EM FX looks to USD for direction – Danske Bank

Analyst at Danske Bank Mathias Mogensen assessed the recent developments in the EM FX space.

Key Quotes

“EM FX yesterday continued a smooth recovery from their eight-month lows seen last week. In the current environment of USD strength and climbing US yields, the 300bp emergency rate hike in Turkey helped to prevent TRY’s free fall”.

“Another supportive factor for EM FX came yesterday through the May FOMC minutes, which showed that the committee stays divided between three and four hikes in 2018”.

“Despite the apparent relief in EM FX delivered by the Turkish hike, US rate and dollar developments remain key for appetite towards developing economies”.

“We continue to point to the risk of USD strength near term due to the relatively cyclical stance of the US versus the rest of the world, but crucially we think US yields will take a breather before long as a substantial rate repricing has now taken place”.