Should the emerging market suffer?

Emerging market currencies are coming under increasing pressure from rising US interest rates and growing nervousness in the financial markets. Will these emerging markets suffer?

De U.S. dollar has recovered in recent weeks from the blows that the currency has received since the end of 2016. For the first time since the beginning of this year, you're getting just under $1,20 for $1. The dollar's recovery is mainly felt in the emerging countries. A broad basket of currencies has fallen more than 2% against the US currency in 3 weeks. For many parties, this evokes bad memories of the month of May 5 years ago.

Unrest among investors
On May 21, 2013, the then Fed chairman alluded to Ben Bernanke on the gradual scaling back of a major stimulus program for the US economy. The prospect of the Fed taking a more conservative stance has caused a lot of unrest among investors. Fearing rising interest rates, they withdrew their money en masse from the bond market.

This shot up US Treasury yields; from just over 1,5% to almost 3%. The rise in interest rates put an end to a popular game for institutional investors: the carry trade. Money was borrowed in the United States (US) at a low interest rate, in order to lend it out in emerging countries at a significantly higher interest rate.

No copy from 2013
Meanwhile, long-term interest rates in the US have risen further than in 2013. The interest rate rise this time is caused by investors anticipating a growing budget deficit, rather than the fact that they are panicking to withdraw their money from government bonds. It first part The rise in interest rates has not been at the expense of emerging markets.

Many of these countries have had much larger currency reserves and healthy economies since 2013. In addition, short-term interest rates are still quite low. For investors looking for attractive returns, there was no reason to turn their backs on emerging markets.

Tip of the iceberg
However, inflation in the US rose from 1,6% (June 2017) to 2,5% (April). This clears the way for the Fed to raise interest rates more quickly. Moreover, the tension in financial markets is increasing. When investors want to reduce risk, there is a flow from emerging market currencies to safe havens, such as the dollar and Swiss franc.

For the time being, mainly the Turkish lira and the Argentine peso attracted attention with price drops of more than 15% in 2018. However, there is a good chance that in a few months' time it will turn out to be just the tip of the iceberg.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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