Currencies of emerging markets flashing a warningSINGAPORE: The year has been great so far for risk assets from stocks to credit, and emerging-market assets have joined in the party. Except, recently, for their currencies.
Among the observations in a widening debate on the missing gains: some fund managers highlight their greater sensitivity to the risks of a global slowdown.
The fact that these exchange rates have largely gone sideways since the end of January, suggests continuing worries even as global equities build on their first-quarter surge.
Conversely, any pick-up in developing-nation exchange rates could be a good sign that the global appetite for risk is truly back in bullish mode.
While bonds and stocks have been able to take heart from central banks’ shift away from policy normalisation, for the currency market, it’s going to take actual evidence of an acceleration in growth before a reaction occurs. That’s the thinking of Bryan Carter, head of emerging-market fixed income at BNP Paribas Asset Management in London.
The very reason for the Fed’s about-face after all was the sluggish economic data and growing risk of a “growth shock,” Carter said.
“We don’t see FX outperforming until the data in Europe and emerging markets convincingly demonstrate an upturn, and investors reset their forward growth expectations higher.”
Dirk Willer, head of emerging-market fixed income strategy at Citigroup Global Markets in New York, puts particular blame on the euro region, saying that a weak euro has held back a rally in a number of other currencies against the dollar. That in turn has stemmed in part from the slowdown in China, on which the region has increasingly relied.
With better China purchasing manager indexes, “we may be able to look forward to a turn in eurozone data as well. The pessimism surrounding the euro may start to fade, removing a headwind for EM FX,” he said.
After a decade of easy money from the rich world’s central banks, developed-nation fund managers might have largely had their fill of emerging market currencies. It’s a phenomenon that Institute of International Finance analysts including chief economist Robin Brooks call “EM positioning overhang.”
That’s why the Fed’s dovish pivot this year – which has helped stoke the rally in everything from stocks to corporate bonds – isn’t having such a big impact on some exchange rates, they argue.
IIF international portfolio tracking data show “the volume of flows to have been on a steadily declining trend for many years, with each successive dovish shift from the Fed less potent than the one before,” the group wrote last month.
Kiran Kowshik at UniCredit Bank AG said he and his colleagues “aren’t really convinced” by the “overhang” theory. Instead, he highlighted in an April 2 note that foreign-direct investment inflows (FDIs) “have stagnated at weaker levels” for emerging markets. FDI and current-account flows didn’t tend to shift quickly based on shifting central bank policies or global risk appetite, he noted.
The bigger problem is that emerging-market growth has suffered a structural slowdown in recent years, offering little incentive for developed-nation investors to pour in.
Another flow dynamic to note: the moves that some current-account deficit countries took to reduce their vulnerabilities since the 2013 taper tantrum are largely done, he argued.
Source: Bloomberg
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