EM FX: Improving global growth outlook offering more support – MUFG

starting this year on a stronger footing than last year as they continue to prove relatively resilient on the whole in the face the recent adjustment higher in US yields.

Key Quotes

“One of the key differences compared to last year is that the cyclical momentum of the Chinese and global economies have both improved which is offering more support for high beta emerging market and commodity-related currencies. It stands in contrast to at the start of last year when investor pessimism over the outlook for China’s economy reached a crescendo. It has allowed emerging market currencies such as the Brazilian real to quickly reverse initial weakness following the election victory for Donald Trump.”

“The release overnight of the latest inflation reports from China provided further encouraging evidence that disinflation pressures are easing. The annual rate of PPI growth accelerated more sharply than expected to 5.5% in December reaching its fastest rate since September 2011. It also provides a further positive signal that China’s economy is expanding more solidly which is helping to boost global growth. The improvement was evident in the latest global manufacturing PMI surveys which have increased sharply in the second half of last year from 50.1 in May to 52.7 in December reaching their highest level since February 2014.”

“The improving global growth outlook is helping high beta currencies to better absorb the impact of higher US yields. However, it also makes the Fed more likely to speed up the pace of rate hikes in the coming years by dampening Fed concerns over external developments which if the Fed follows through would continue to test the resilience of emerging market currencies.”