Implications for USD and EM currencies of the end to 2019 US rate hike – CitiBank

According to analysts at CitiBank, the new stance of the Federal Reserve could favor emerging market currencies and weaken the US dollar.  

Key Quotes:  

“At the March FOMC meeting, the US Federal Reserve left policy rates unchanged and surprised investors by expecting no further rate hikes for 2019 versus two hikes previously. There remains one more rate hike in 2020, while the “longer run” estimate was left unchanged at 2.75% without defining the time period.”

“USD Weakness expected – While the USD has been supported by trade tensions in 2018, Citi analysts do not see this performance repeating in 2019. A more dovish Fed and cooling US growth rate points to a peaking USD.

“EM likely to outperform – If US rates have peaked and other developed markets see limited interest rate pressures, low EM yields and firmer EM currencies are likely to be sustainable. As US equity returns were 3 times higher than EM returns in the last decade, there is a strong case for long-term EM to catch up and outperform.”