According to Paul Fage, Senior Emerging Markets Strategist at TD Securities, one of the key factors driving EM FX weakness this year has been the rise in US rates which has gone hand-in-hand with broad-based USD strength.
Key Quotes
“We find that a regression model using four variables – S&P, the BCOM commodity index, EURUSD and US 5y swap rates – explains about 50% of the variance of our EM FX index.”
“Inputting TD’s forecasts into the regression model, we expect the EM spot FX index to be more or less unchanged by the end of this year. Given the positive carry this is a moderately positive outlook for EM FX.”
“However, aside form the four global financial variables used in our regression model, there are other factors which drive EM FX performance. It is hard to precisely define what these are, but we think the EM growth outlook is key. And in this respect recent higher frequency data has not been encouraging, pointing to some slowdown.”
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