It was my pleasure again to host the EM panel for the third year running which included both bank and fund points of view. Our general view being that EM is all about Oil, China and the Fed.
Later that same day the FOMC was poised to raise rates.... Or was it? That didn’t stop us taking an audience poll by the raising of greenbacks for a hike and holding up redbacks for a ‘do nothing’ response. The response was a 50/50 vote and in the end the fed did nothing. Even at the time of writing. They’ve done nothing. Probably a good thing for most EM pairs but an annoyance for many central banks including India who would like the US to just get on with it.
What if they raised by 12.5 points instead of 25?
Why not? That would give CNBC something to talk about for months. Perhaps even set a new level of fiscal and monetary policy. Whilst “fear drives the hike” we will have to wait and see.
Some Central Banks may indeed be happy with the hike when it comes. Brasil started the term ‘currency war’ but this time its not 97. They’re not in the rosy position of 2004 but they also aren’t “looking down the back of the couch for dollars.”
“Like a teenager you can’t tell it to do anything,” the PBoC had recently shocked the market with its sudden devaluation. Whilst most central banks tend to announce big numbers on a given Tuesday at say 9am with plenty of warning the PBoC had caused shock and awe and it must be said achieved its goal. Was this in response to the IMF claiming that RMB didn’t have enough volatility in it or was it in response to jockeying in US markets?
There’s a funny old correlation between Oil and EM. Some countries are quite dependent on it while others produce a fair amount of it and some just need it to produce all those cheap goods and services. The recent drop in oil has been quite positive for India who consumes a lot of diesel and kerosene even if sometimes just to light the way forward. Iran has slowly been allowed back to the global party - perhaps not at the best time for price but a good one for diplomacy.
EM is a commodity class currency set and lately when the dollar strengthens oil weakens. Unless you’re in Brazil - just when the global price has come down - Petrobas has put the price up. The other question is what happens when the US becomes a net Oil exporter?