Downbeat Fed to encourage further investment in emerging markets

Gains made in emerging markets in the first quarter of 2019 are set to extend as Fed chairman delays prospect of further rate rises

Jameel Ahmad, OpinionIndustry Expert
Jameel Ahmad is the Global Head of Currency Strategy and Market Research at FXTM, having joined the company in May 2014 as Chief Market Analyst. He specialising in financial market developments, with a particular emphasis on global currencies, commodities and emerging markets. He holds a BA (Hons) degree in Business Studies with Accountancy & Finance from the University of the West of England. He recently completed an executive education course in Unconventional Monetary Policy at the Barcelona Graduate School of Economics.

March 21, 2019

CURRENCIES

The recovery that emerging markets have managed to build throughout the first quarter of 2019 is set to extend further after the downbeat tone that was presented by the Federal Reserve after its latest monetary policy meeting. Interest rate expectations in the United States will be significantly downgraded after the comments made by Jerome Powell, in which the Fed Chair strongly indicated that interest rates will remain on hold for some time and that it ultimately appears that the Federal Reserve will extend its narrative around the need for “patience” over the coming months.

Pushed-back US interest rate expectations will be enough to fuel some unwinding of U.S. dollar positions from a greenback that remains at historically high levels, and the immediate reaction will be that this benefits the likes of the euro and Japanese yen. Weakness in the dollar will also prove supportive to gold, but where I see the real opportunities for investors are in emerging markets. This includes both emerging market stocks and emerging market currencies. Returning capital into emerging markets will also be a headline that catches further steam moving forward.

Returning investor capital and inflows into emerging markets is a trend that will increase in popularity throughout the developing world and across different continents. This will stretch across the likes of China, South Africa and Saudi Arabia. We should also not discount the momentum that emerging market currencies should be able to build, when we consider that many of the currencies belonging to the developing world remain significantly weaker than where they were valued in the time before the Fed started monetary tightening four years ago.

I am looking at the prospects of a stronger Indonesian rupiah, Chinese yuan and Malaysian ringgit as a result of the dovish Fed message. The Singapore dollar will also be encouraged by a softer greenback, while the South Korean Won will be watched after it has lagged behind its Asian counterparts so far in 2019. When it comes to the African continent, I would look for a momentum shift in the South African Rand as a result of reversed interest rate optimism in the United States.

What will be concerning investors behind their trading desks is that it can’t be denied that there is a coordinated downbeat view that is being presented by central banks and senior officials across the globe this year. The Fed has certainly now joined this party by issuing its own need for “patience” and that global headwinds remain a threat that needs to be closely watched.

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