China supplants Fed as main risk to EMs

Abstract

Significance While futures markets are assigning a 28% probability to a rate hike this month, emerging markets (EMs) are likely to remain under strain regardless of whether the Fed tightens policy or decides to wait longer. While a rate hike in September is likely to strengthen the dollar, putting further pressure on EM currencies, a delay risks being perceived by investors as an indication of the severity of the China-induced market turbulence. Impacts The rise in US interest rates has been well anticipated and will prove less disorderly than the 2013 'taper tantrum'. The strong dollar will put strain on fixed exchange rate regimes, such as dollar pegs in Africa and the Middle East. The benefits to EM exports from the declines in local currencies will be offset by the slump in China's demand.