Economists at BBH argues that soft US data and delays to fiscal stimulus plans from the Trump administration has led to a rethink of Fed tightening expectations.
“While a June hike is still largely priced in, markets no longer view another hike in H2 as likely. Indeed, only one hike is currently priced in for 2018 followed by only one in 2019. The benign global backdrop has helped propel many EM currencies to new cycle highs this month.”
“One big negative factor for EM FX this past quarter has been lower commodity prices. Here, the outlook remains very volatile as markets struggle with the possibility of persistent excess global supply in several industrial commodities. WTI oil is down nearly 15% from the April 12 peak, while iron ore is down nearly 35% from the April 5 high.”
“Whatever the pace and scope of Fed tightening is, we still believe it is very important for investors to continue focusing on the fundamentals and on hedging out currency risk whenever feasible. Individual country risk must be monitored closely. We believe investors are being too sanguine on EM, as the current rally is being led by MXN, TRY, and ZAR, all of which face heightened risks.”