Emerging markets hit by ‘toxic’ mix of rising rates and slower growth

Emerging market currencies have fallen the most since the early stages of the pandemic as a “toxic” combination of rising interest rates in the US and slowing Chinese growth cloud the outlook for developing economies. development around the world.

An MSCI gauge of emerging market currencies has fallen more than 4 percent since early April as the Federal Reserve embarks on aggressive monetary policy tightening in a bid to rein in high inflation, boosting the US dollar as it hits the US dollar. stocks and bonds. Draconian coronavirus lockdowns in China have increased pressure by threatening a crucial source of demand for emerging economies.

China’s renminbi fell to its weakest level against the dollar in more than 18 months on Monday after data showed the country’s exports grew at the slowest pace in two years last month, fueling a new sell-off. in emerging market currencies.

“We’ve had this cooldown in Chinese demand at a time when the Fed is raising interest rates and inflation is still going up,” said Cristian Maggio, head of emerging markets portfolio strategy at TD Securities. “As if that wasn’t enough, we still have the risks related to the war in Ukraine. It’s a very toxic combination.”

Rising US interest rates make emerging markets relatively less attractive to investors, leading many to move their money out of riskier economies and into the relative safety of the US financial system. Still, currencies in the emerging world had mostly shrugged off the prospect of tighter Fed policy until a month ago, helped by rate hikes from emerging market central banks that faced their own inflation problems last year.

The Russian invasion of Ukraine in February, which pushed up the price of goods from oil to wheat, also bolstered the currencies of commodity-exporting countries, including Brazil and South Africa.

“Emerging markets have had the tailwind of higher rates and higher commodities,” said Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management. “The question was always how long would that last.”

But a more aggressive Fed, which last week raised interest rates by half a percentage point for the first time since 2000, has sparked a renewed sell-off in risky assets like stocks as emerging-market currencies slide.

Commodity-linked currencies such as the Brazilian real and South African rand have given up some of their earlier gains, while commodity importers such as India have suffered further woes, where the central bank was reported to be intervening in the markets to support the level. of the rupee on Monday.

“A lot of this pressure is coming from the Federal Reserve and is not specific to emerging markets,” said Uday Patnaik, director of emerging market debt at Legal & General Investment Management. “But right now there’s a tightening of financial conditions everywhere and emerging markets can’t escape that.”

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