Emerging markets gains on dovish Fed
Fredrik Skoglund, analyst at SEB, comments on the impact the Fed announcement might have on emerging market currencies.
The Fed dropped the word “patience” but revised down its economic outlook and slashed its medium fund rate projected at end-2015 from 1.125% to 0.625%.
The dovish signals put markets in a risk on mode giving most assets a boost as investors pushed back US rate hike expectations. EM currencies are especially well placed to benefit from the increased risk sentiment as most have had a weak performance this year.
Those currencies with strong links to commodities and the US economy, i.e. most LatAm currencies, together with the fragile five (BRL, TRY, ZAR, INR, IDR) stand to gain the most.
The fragile five are highly reactive to US monetary policy since they need to attract short-term portfolio inflows to finance their large current account deficits.
Looking forward, EM currencies characterized by large degrees of country specific risks, such as TRY, BRL and RUB, will likely remain vulnerable while those with strong links to the US economy, such as MXN, will likely gain.
Focus today will be on Polish CB meeting minutes due at 14.00 CET.
The bank cut its policy rate by 50bps to 1.50%, more than expected, at its last meeting. Furthermore, it expects that inflation will remain below the 2.5% +/- 1% target until 2017.
It has signaled that its easing cycle has come to an end and any dovish surprises in the minutes may therefore spark PLN weakness.
Russia is due to release February retail sales and unemployment rate today at 14.00CET, with both numbers expected to underline the impact of sanctions.
An interesting observation is that the correlation between USD/RUB and oil prices has decreased. Measured over a 100 day period it peaked on January 26 but has now fallen.
The RUB has strengthened 1% against the dollar from the beginning of March until yesterday, while Brent crude has fallen 16%. Ukraine has proposed giving territories held by separatists a “special status” with greater selfgovernance.
The legislation needs signing by President Poroshenko before coming into effect. Russia’s FM Lavrov has called the legislation “an abrupt retreat from the Minsk agreements”.