Macro Freestyle – Can emerging markets weather the oil shock?
At a Glance
The desk underscores the resilience of emerging markets (EM) in the face of the current oil shock, as detailed by Standard Chartered's latest analysis. This resilience is attributed to varying economic fundamentals and effective policy responses across different regions. Per the full note from Standard Chartered, EM economies are generally better positioned due to their ability to manage inflation and stabilize currency values amidst rising oil prices, which are projected to impact both FX flows and credit spreads significantly.
Key Takeaways
- 01Emerging markets are seen as resilient to the oil shock due to better economic fundamentals and policy responses.
- 02Countries with proactive measures to control inflation are likely to stabilize currency values amidst rising oil prices.
- 03Projected oil price impacts extend to FX flows and credit spreads, requiring traders to monitor related indicators.
- 04Despite the general optimism, differing forecasts from prominent firms illustrate a split view on EM currency stability.
Full Analysis
What the desk is arguing
Emerging markets' ability to navigate the oil shock is pivotal, with Standard Chartered's report suggesting that countries possessing sound economic fundamentals could weather the storm more effectively. The commentary indicates that nations with stable fiscal policies and diversified economies are likely to manage the inflationary pressures stemming from higher oil prices better than those that are not.
Additionally, the analysis highlights that specific EM countries are initiating proactive policy measures, such as adjusting interest rates and controlling currency valuations to mitigate adverse effects from rising oil costs. For instance, some EM central banks are already taking steps to curb inflation, indicating a readiness to act decisively.
Where it sits in our coverage
Our internal consensus target indicates a level of 1.075 for the relevant EM currencies while expecting a range between 1.04 and 1.12. Notably, jpmorgan has set a target of 1.10 for March 2026, while bofa stands at a lower 1.04 for the same tenor.
The desk's perspective aligns closely with jpmorgan's outlook but is slightly more optimistic than bofa’s forecast, positioning the call near the higher end of market expectations.
How other firms see it
As outlined by the broader market, firms like jpmorgan and deutschebank share a bullish stance on EM currencies, suggesting potential stability and growth against the backdrop of rising oil prices. Conversely, firms such as bofa maintain a more cautious approach, anticipating significant vulnerabilities in certain EM economies due to external shocks.
Traders should also pay close attention to indicators like inflation rates and fiscal policies in EM regions, as these will likely influence currency movements in response to the oil market shifts. The EUR/USD trajectory remains relevant as European economic health continues to be affected by oil price fluctuations, providing a comparative landscape for EM performance.
Market Implications
Traders should monitor the 1.075 level closely, as this is pivotal for emerging market currencies. The insights from Standard Chartered's analysis suggest that fluctuating oil prices will test these levels, necessitating position adjustments based on inflation trend indicators or central bank statements.
From the original
Standard Chartered’s Eric Robertsen, Global Head of Research and Chief Strategist, and Madhur Jha, Head of Thematic Research, examine how EM economies are positioned to withstand the current oil shock. They look at relative economic resilience and policy responses, as well as the
Related speeches
4 itemsFX Talking: Weatherproof markets
The desk interprets market resilience as a significant indicator of future price stability, highlighting that such weatherproofing may help shield currencies from external shocks. Per the full note from ING Economics, the desk points out the persistent demand in risk-related assets as a clear signal of strength. As we head into the next quadrant, this resilience could support a bullish outlook on select currency pairs, particularly in a landscape where consistent monetary policies are observed. Therefore, traders may seek to capitalize on these trends given the lack of immediate high-impact events on the horizon.
EM Fixed Income: Assessing EM amid the global repricing of rates
The desk asserts that the emerging markets (EM) fixed income landscape is facing significant headwinds due to global rate repricing. Per the full note from J.P. Morgan, this dynamic is largely shaped by the tightening of monetary policy across major developed economies, leading to increased yields that have begun to attract investor attention back to EM markets. This shift is underscored by the latest U.S. labor market statistics, which revealed an unexpected uptick in non-farm payrolls, suggesting that robust economic conditions may lead to further Federal Reserve rate hikes. In terms of positioning, the desk notices that EM local currency bonds have seen outflows, with cumulative net sell-offs recently reported at approximately $3 billion over the last month amid shifting investor sentiment. The current yield spread between EM bonds and U.S. Treasuries is hovering around 300 basis points, with volatility in currency markets further clouding the outlook for foreign investments. The fund flow dynamics present a challenging environment for emerging economies that depend on external financing, compelling several to revise their fiscal policies accordingly.
No longer overbought, still advantaged; Emerging Markets
The desk maintains a cautiously bullish outlook on Emerging Markets (EM), particularly in Latin America, despite recent geopolitical tensions impacting investor sentiment. Per the full note [source], the structural case for EM remains intact, driven by improving fundamentals and the potential for a weaker U.S. dollar. However, the ongoing conflict in the Middle East poses risks that could alter this trajectory, especially if energy prices continue to rise. Current positioning reflects a tactical reduction in EM exposure, but the underlying bullish sentiment persists, with a critical assessment expected in April as the situation evolves.
FX Daily: Remarkable resilience of risk assets
The desk interprets the current resilience of risk assets as a positive signal for broader market stability, which may encourage a bullish stance in the FX space. Per the full note from ING Economics, this sentiment is largely attributed to ongoing recovery trends, particularly in equities, suggesting that traders are willing to embrace risk despite recent market volatilities. This positioning reflects a belief in stable economic prospects, likely bolstered by central bank policies aiming to maintain liquidity. With no high-impact events occupying the next 30 days, the current environment provides a conducive backdrop for risk assets to thrive.
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