The dollar will determine emerging market asset moves

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.