Tuesday, 28 March 2017

Is EM FX cheap?

It seems the asset allocation community, perhaps on a least worst basis, has pumped EM local bonds and equities this year. Set against an expensive US Dollar and cheap Euro are EM FX rates cheap?
Just looking at the REERs of some of the bigger countries it seems:
  • Commodity exporters are generally at undemanding levels and maybe benefiting from a recovery in commodity prices over the next few years
  • However some de-valuers such as Nigeria and Turkey have maybe offset much of the devaluation through inflation
  • Many of the others are not 'cheap', in part as the FX falls they have had have been eroded by inflation and also the Yen/ Aussie/ Euro falls of recent years. China is also seemingly on a controlled devaluation path for the foreseeable future
  • Some of the East European countries pegged to the Euro look expensive as well as Saudi. If the Euro rallies it will pressure the East European countries even more.
  • At a cross current to this you have negative political dynamics in several countries (notably Turkey and some of the sub-Saharan African countries)
Against this, this Friday we have US PCE numbers which may refocus attention on how much the Fed's hands are tied, particularly given we have just had a US fixed income short positioning clear out.

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