miércoles, 12 de noviembre de 2014

miércoles, noviembre 12, 2014
November 7, 2014, 2:28 PM ET

Good News for the U.S. Economy Is Bad News for Emerging-Market Currencies

By Ian Talley
 
The firmer U.S. economy, as seen in Friday’s jobs report, appears to be deepening the tumult for some key emerging-market currencies.

Investors channeled trillions of dollars to emerging markets in search for higher profits amid a low-rate environment created by U.S., European and Japanese central banks. Now, the potential for higher rates in the U.S. is drawing capital back to the U.S.

Friday’s jobs report showed the U.S. labor market improving faster than the Federal Reserve expects. While that may not significantly shift the central bank’s rate outlook, it gave investors a reason to tweak their forecasts for an earlier hike.

There’s a push-and-pull effect on cross-border cash flows. The push: Higher borrowing costs make it more difficult to fund investment in emerging markets, curbing demand and accelerating growth slowdowns. The pull: Higher rates mean better returns for investors in the U.S., a relatively safer investment climate.

A shift in rate expectations caused the so-called “taper tantrum” last year. Bonds, equities and currencies in emerging markets took a nose dive after comments from then-Fed chairman Ben Bernanke moved forward market expectations for the end of the bank’s latest round of bond-buying.

This chart from the Institute of International Finance’s latest Capital Markets Monitor shows the strong correlation between interest rates and emerging-market investment by U.S. mutual funds. (The Fed’s expanding balance-sheet served as a proxy for falling rates because the purchases reduce the cost of borrowing.)
 
With rates are set to rise, the inverse could prove true for emerging-market flows, particularly in countries facing particularly tough obstacles to growth.

“We may have seen a foretaste of that in the recent selloffs,” said Hung Tran, IIF’s executive managing director.

As many emerging markets strain their growth potential without major economic overhauls, some countries such as Brazil and South Africa are finding it difficult to make the policy changes that could boost output. Moody’s Investor Service Thursday downgraded South Africa’s debt rating by one notch amid power shortages in a labor turmoil. Others are also facing geopolitical challenges, such as Russia, the target of Western sanctions.

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