Emirates NBD Research
 

Find anything about our articles and more.
Enter a query in the search input above, and results will be displayed as you type.

Try typing "Dubai Economics", "Dubai GDP", "GCC Macro"

Emirates NBD
Search
Subscribe
   
  • Home
  • Economics

    Emirates NBD Research provides detailed coverage of 16 GCC and MENA economies, analysing them from a top down macro and strategic perspective as well as by a bottom up sector by sector approach.

    • SUBTOPICS
    • GCC Macro
    • MENA Macro
    • Global Macro
    • Sector Economics
    • Monthly Insights

     

    Latest Article UAE and Saudi PMIs slip in February
    Latest Article Indian GDP returns to growth but misses expectations
    Latest Article Vaccination rollouts will determine 2021 growth rate

     

  • Markets

    Emirates NBD Research publishes reports on global forex, rates and commodities, as well as regional fixed income and equity markets.

    • SUBTOPICS
    • Foreign Exchange
    • Fixed Income
    • Commodities
    • Equities
    • Monthly Insights

     

    Latest Article Oil at 100: No.
    Latest Article Emerging markets at risk of higher US yields
    Latest Article US yields race ahead

     

  • Daily
  • PMIs

    Emirates NBD sponsors Purchasing Managers’ Indices for the UAE, Saudi Arabia, Egypt and Dubai. The indices are compiled by IHS Markit, the leading global provider of financial market data.

    • SUBTOPICS
    • UAE PMI
    • Saudi Arabia PMI
    • Egypt PMI
    • Dubai PMI
    • Methodology

     

    Latest Article UAE and Saudi PMIs slip in February
    Latest Article Dubai PMI signals slower start to 2021
    Latest Article Regional PMIs show slight improvement in January

     

  • About Us
  • EmiratesNBD.com
  • Subscribe
EMERGINGMARKETS > MARKETS

Emerging markets at risk of higher US yields

Edward Bell - Senior Director, Market Economics
Published Date: 22 February 2021

Facebook
Linkedin
Twitter
Email
Print

 

Rising UST rates are having a near term effect on currency markets, particularly among emerging market FX rates. Our outlook for FX in general in 2021 is growth rather than rates dependent which should support the outlook for EM FX in principle. However, the sharp steepening of the UST curve and a fitful start to Covid-19 vaccination campaigns in emerging markets means there is a risk of EM FX pulling back sharply against the dollar.

Wide differentials to US dollar rates along with relative economic outperformance in 2020 compared with developed markets meant major emerging market FX rates bounced back strongly from a Q2 sell-off, albeit with some notable exceptions. Growth in emerging markets is poised to outperform developed markets this year and the recovery will be more widespread than in 2020 when China was the only major economy to record expansion. Better economic performance in India and across South-East Asia in particular should help to push EM growth rates higher.

However, deployment of Covid-19 vaccines has begun at a slow pace across many emerging markets. Several are only just beginning and likely won’t deliver first doses to the majority of their populations until well into the second half of 2021. Prolonged interruption to pre-pandemic levels of economic activity—particularly the closure of tourism sectors upon which many emerging markets are reliant upon as a source of FX inflows—will weigh on growth outlooks even if control over Covid-19 infection levels looks plausible in the medium term.

Past periods of steepening saw sell offs in EM

Given the highly trade-dependent structure of many emerging market economies the reflation trade should notionally be supportive for growth and FX rates. Investors seeking yield and high commodity prices both feed into a positive story for EM FX. In the short-term, however, the steepening of the UST curve presents a clear and present risk for EM FX.

Source: Bloomberg, Emirates NBD Research.

During past periods of UST curve steepening, many EM FX pairs weakened against the dollar as funds flowed toward the safety of UST despite wide nominal interest rate differentials in favour of EM currencies. The UST 2s10s curve has now broken above 120bps as policy from the Federal Reserve keeps short-term rates anchored at low levels and reflation expectations help to push 10yr UST yields higher.

Emerging market currencies resilient so far

So far EM FX has held reasonably steady with major pairs holding their year-to-date gains against the dollar. TRY has been a notable outperformer, gaining more than 6% against the USD so far this year while EGP is up 0.5%. A broader index of EM currencies weighted by nominal GDP levels is down slightly so far in 2021, however, as Latin America remains an area of relative underperformance along with mid-sized economies in Asia (South Korea, Indonesia and Malaysia in particular).

EM currency index - rebased 1yr

Source: Bloomberg, Emirates NBD Research. Note: rebased 1yr. Weighted by nominal GDP.

While yields remain attractive in many EM in both nominal and real terms, the risk of rising UST yields pulling funds out of EMs could result in a disorderly sell-off. Measured by their carry-to-vol ratios, TRY and INR both stand out as being at risk of a weakening move against the dollar while ZAR, MXN, RUB and IDR form a second tier of at-risk EM currencies.

EM yields vs FX volatility

Source: Bloomberg, Emirates NBD Research. Note: implied yields from forwards or NDFs where applicable.

Written By:
Edward Bell, Senior Director, Market Economics

RELATED ARTICLES

See all

LATEST ARTICLES

Monthly Insights: February 2021
23.02.2021

UAE and Saudi PMIs slip in February
03.03.2021

Indian GDP returns to growth but misses expectations
28.02.2021

See all
 

 Subscribe to our newsletter


Never miss out what is going on in UAE Economics

KEEP READING MORE

Monthly Insights: February 2021

A round-up of our key research insights and forecasts in February 2021

MONTHLY INSIGHTS, MENA - 23.02.2021

Dubai PMI moves back into expansion territory in December

The Dubai PMI rose to 51.0 in December 2020.

PMIS, ECONOMICS - 11.01.2021

Oman and Bahrain tap bond markets early in 2021

Oman and Bahrain were the first GCC sovereigns to tap capital markets this year, as they sought to take advantage of the low-rate environment to finance expected budget deficits.

ECONOMICS, GCC - 26.01.2021

 

Rally in risk to weigh on dollar

A sustained rally in risk markets could take the fizz out of the dollar in the near term.

MARKETS, FX - 08.02.2021

Oil at 100: No.

Spare capacity remains ample amid demand still in recovery mode

MARKETS, COMMODITIES - 02.03.2021

Jordan set to return to growth

Having come through 2020 comparatively less scathed than some of its MENA peers, we expect a modest ongoing improvement in Jordan's economy in 2021, provided the Covid-19 pandemic starts to abate.

ECONOMICS, MENA MACRO - 27.01.2021

Kuwait: Bigger draft budget for FY2022 but political gridlock remains a risk

The budget for the coming fiscal year starting 1 April 2021 shows a deficit of KWD 12.1bn.

ECONOMICS, GCC MACRO - 27.01.2021

  • Economics
  • Markets
  • PMIs
  • About Us
  • Subscribe to our publications
  • Economics
  • GCC Macro
  • MENA Macro
  • Global Macro
  • Sector Economics
  • Markets
  • Foreign Exchange
  • Fixed Income
  • Commodities
  • Equities
  • PMIs
  • UAE PMI
  • Saudi Arabia PMI
  • Egypt PMI
  • Dubai Economy Tracker
  • Methodology
  • About Us
  • Subscribe to our publications

 


Terms and Conditions
Copyright © 2021 Emirates NBD Bank PJSC. All Rights Reserved