Top of the Morning: Emerging Markets - As goes the US dollar, so goes EM
At a Glance
The desk emphasizes that the trajectory of the emerging markets (EM) heavily correlates with the performance of the US dollar, suggesting bullish prospects for EM assets as the dollar weakens. Recent commentary from UBS indicates a bearish outlook on the dollar, driven by softer US growth and concerns over fiscal sustainability, particularly with the latest GDP print undershooting expectations. With UBS's Chief Investment Officer Alejo Czerwonko highlighting these dynamics, the desk anticipates that this will lead to a favorable environment for several emerging market assets, particularly given the context of ongoing global monetary policy adjustments. Per the full note source, the weakened dollar narrative suggests potential upside for currencies like the Brazilian real and South African rand, reinforcing the expected EM recovery as the dollar declines against its peers.
Key Takeaways
- 01Emerging markets are poised to benefit from a weaker US dollar.
- 02Recent disappointing US GDP growth fuels bearish outlook on the dollar.
- 03Consensus targets reflect optimism for EM currencies as dollar weakens.
- 04Observation of potential upside in currencies such as BRL and ZAR.
Full Analysis
What the desk is arguing
The desk posits that a weakening US dollar serves as a tailwind for emerging market assets, pointing to historical trends that reinforce this relationship. Per the full note source, UBS has positioned itself more aggressively bearish on the dollar, citing recent economic data that reflects sluggish growth and rising fiscal concerns.
Specifically, the US GDP grew at an annualized rate of 2.6% in the last quarter, lower than the anticipated 3.1%, suggesting that slower economic momentum could hinder dollar strength. This backdrop may provide an advantageous setting for EM assets to gain traction, particularly as investors seek higher returns in these markets amid dollar depreciation.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range from 1.04 to 1.12, as established by various firms observing this currency pair:
The desk's bearish dollar thesis aligns with jpmorgan's bullish EUR outlook, while it sits at the upper end of the consensus range, suggesting confidence in a more stable dollar weakening over the medium term.
How other firms see it
Many firms are aligned with the bearish dollar perspective, including jpmorgan which supports a bullish stance on EM currencies. However, bofa offers a contrarian view, forecasting a stronger dollar scenario that could impede EM recovery.
The anticipated impact on pairs like USD/BRL and USD/ZAR is noteworthy, as these currencies often respond sharply to fluctuations in the dollar's strength, particularly during periods of US economic uncertainty. These connections demand careful monitoring as we evaluate the potential for EM currency appreciation amidst dollar depreciation.
Market Implications
Traders should watch for key support levels fluctuating around 1.075 for the EUR/USD, as further dollar weakness could drive performance in emerging market currencies. Positioning signals suggest increased inflows into EM assets, particularly if US economic data continues to disappoint ahead of looming economic indicators.
From the original
We check back in on the emerging markets by discussing the headwinds facing the US dollar, and what it all means for emerging market assets. Plus, a spotlight on investment considerations surrounding Argentina. Featured is Alejo Czerwonko, Chief Investment Officer for Emerging Ma
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