Rules of the game in emerging countries: a new element

In a recent post I mentioned that the improvement in the greenback had an strong impact on emerging countries. Capital outflows and lower emerging currencies were mentioned as a source of concern. We have to add the interest rate spread that is now wider than it used to be. It was almost stable since the beginning of 2017 with an average spread close to 330 bp. This is no longer the case since mid-April with the change in the greenback profile.
Rules of the game are deeply changing for emerging countries even if every country is not hurt in the same way. Rules have changed, then be attentive
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The rules of the game have changed for emerging countries

The emerging countries’ environment is dramatically changing. It used to be an easy place to play but it is no longer the case. Stability in developed countries’ monetary policy was an opportunity for them. Their interest rates were higher and the spread with the US was a strong source of return.
What has changed?
The dollar, which was perceived as weak by many investors, now follows an upward trend. Since mid-April its effective exchange rate has appreciated by more than 4%. As it can be seen on the graph, it’s also a surge vis-a-vis the euro.  Continue reading

2 graphs on how the Fed is helping the Euro Area

Fed’s decision on Wednesday to keep a strict monetary policy will help the euro area. It will extend the monetary policy divergence between the Fed and the ECB and this will drive down the European currency.
Since last summer, that’s what was observed. A very accommodative and credible monetary policy for an extended period on the ECB side and an expected change on Fed’s side circa summer 2015. (before of after the summer 2015 is not important here). This divergence led to a lower euro.
Things changed on October the 15th. Gloomy expectations on the world economy have suggested that the Fed could postpone the change in its monetary policy. US short-term forward rates went down rapidly and the Euro depreciation stopped immediately. The shock was temporary but strong (we remember that during  that day the 10 year TBond rate dropped almost to 1.8%). Continue reading