FX Daily: EM equities markets find new friends | Article

With investors already pricing more than one 25bp hike from the Fed at the March 16th FOMC meeting, it is hard to see that pricing moving too much further ahead of the Fed’s meeting next Wednesday. A stable environment for the dollar allows some local stories to win through and that was a key theme in our 2022 FX outlook published last November. 

Latest portfolio flow data does suggest there continues to be strong demand for emerging market assets at the start of the year. It looks as though about $15bn has flowed into EM over the last three weeks, roughly in an 80:20 equity: debt mix. Latin American equity markets have been doing especially well – probably on the strong start to the year for commodities as well as signs that China is ready to start firing up its economy after somewhat of a reset last year. 

We discuss Brazil below, which like Taiwan and China has received the lion’s share of equity inflows to EM. But we also note some other strong equity performances from the likes of Poland, Hungary and Turkey. Additionally, Hungary, South Africa and Thailand appear to have seen some strong inflows to bond markets over recent weeks.

Our baseline view this year has been that the strong dollar story dominates at the start of the year as the Fed resets monetary policy, but a dollar turn towards the end of the year could see a bounce back in selected EM currencies. Recent evidence suggests that trend into EM has started a little earlier than we thought – perhaps on the back of EM investors being very overweight cash and looking to put money to work. As long as these flows are selective, our core dollar calls (stronger against EUR and JPY, especially in 1H22) should be fine. But were e.g. a China re-rating story to build more quickly, headwinds to our dollar bull story could build too.

For today, the US data calendar looks quiet and again the market should remain focused on 4Q US earnings, whether Treasury yields push any further ahead and developments in Ukraine. On that subject, Ukraine 5 year CDS narrowed 100bp yesterday on comments from the Russian Deputy Foreign Minister that he does not see risk of a ‘large-scale’ war. Yet some mixed messages from President Biden on the subject last night will give investors little confidence in returning to Ukrainian or Russian assets.

For today, DXY could drift in a 95.25-95.75 range.