The dollar will determine emerging market asset moves

Abstract

Subject Emerging market asset gyrations. Significance Emerging markets (EMs) are under strain as the dollar has risen by nearly 4% since the middle of April, triggered by a sharp increase in US Treasury bond yields and increasing evidence of slower economic activity in the euro-area. Argentina and Turkey are in the firing line as they hold a high proportion of their external debt in dollars, but the entire EM asset class has suffered sizeable capital outflows, and year-to-date returns on dollar-denominated and local currency government bonds are now firmly negative. Impacts US sanctions could squeeze Iran’s oil exports, putting upward pressure on the oil price though US shale should cap prices below 80 dollars. Foreign holdings of EM local currency sovereign bonds, at risk of a sell-off, are highest in South Africa, Indonesia, Malaysia and Russia. Bank for International Settlements Chief Agustin Carstens recommends EMs build up reserves as “sometimes whatever comes in … will … go out”. For the Institute for International Finance, China, Argentina, South Africa and Turkey are high risk; Russia, Brazil and Philippines lower. US Fed Chair Jerome Powell has reminded investors that tighter monetary policy has been well signposted and should be “manageable” for EMs.