In a recently published report titled ‘US Rates, Policy Divergence, Keep Pressure on Emerging Markets,’ Fitch Ratings noted that following last week’s meetings, they were now expecting one rate hike from the ECB in 2019 rather than two and their forecast for the Fed were unchanged with four hikes in 2018and three hikes in 2019.
Key takeaways
- The different pace of monetary normalisation in the US and eurozone and divergence in underlying growth and inflation dynamics puts upside pressure on the US dollar.
- Recent pressures on EM currencies likely reflect a combination of idiosyncratic risks and the shifting global liquidity backdrop.
- EM vulnerabilities vary and no EM sovereign ratings will be affected by an increase in the Fed Funds rate alone.
- Argentina and Turkey remain at the forefront of the EM FX sell-off, and in both cases, the responses highlight the policy challenges and trade-offs that this presents.
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