EM currencies facing sentiment risk – AmpGFX

EUR/USD is the single most important benchmark for EM FX sentiment and more USD strength is the most obvious near-term general EM risk, but the list of potential additional external shocks to EM is quite long, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“We forecast a slightly stronger USD, but only in the near term. However, the current trend lower in EUR/USD is very strong and could continue.”

“Rising US government bond yields could add to the weakness in EM, especially if driven by higher wage growth or a hawkish shift at the Fed rather than positive growth surprises which has been the case more or less up to now. Correlation between US Treasury yields and EM FX usually increases when the former rises fast.”

“Falling commodity prices could add fuel to the fire too, which was the case with the collapse of commodities prices from the second half of 2014.”

“Liquidity contraction from major central banks could have a massive impact on risky assets in general over the medium term and on EM in particular.”

“Global growth is generally strong, but momentum has been slowing in recent months. A more pronounced slowdown in high-frequent activity indicators would add to the general concerns about EM.”

“Geopolitical risks from trade war to sanctions.”