Guardrails Up!
28 September 2022
Read Time 2 MIN
Global QT
Some emerging markets (EM) are trying to stay in a “business as usual” mode (Thailand’s leisurely 25bps rate hike), but sharp asset price moves and surprising policy U-turns in developed markets (DM) raised questions about EMs’ ability to stay on the sidelines. The Bank of England’s decision to abandon its quantitative tightening (QT) plans and start buying long-dated government bonds to stabilize the market after this week’s massive selloff had an immediate impact – the 30-year U.K. yield narrowed by 107bps following the announcement. However, it also led to multiple “Japanification/policy contagion” comments. The market also made a small adjustment in its expectations (measured by Fed Funds Futures) for the next policy rate hike in the U.S. (to 65bps), as well as for the Federal Reserve’s terminal policy rate (4.4%).
China Currency
J.P. Morgan’s EM FX index bounced after the initial morning weakness, but some currencies required more support than others. China’s central bank resorted to verbal intervention after the renminbi broke through 7.20/U.S. Dollar to the weakest level since 2007 (see chart below). Some reports also suggested that authorities might bring back the counter-cyclical factor in the daily currency fixings to reduce volatility. The renminbi’s moves are affected both by the U.S. Dollar’s general strength (“safe haven” status, a more favorable interest rate differential with major currencies) and China’s policy divergence (easing while the rest of the world is tightening). The latter reflects China’s worsening near-term growth outlook, which is why the official activity gauges for September – to be released on Thursday - will be closely watched.
EM Rate Hikes
EM’s ability to conduct independent monetary policy – rather than to follow in lockstep with DMs - will be tested in this environment. And this includes tomorrow’s rate-setting meetings in Mexico, Colombia, and the Czech Republic. Given Mexico’s never-ending upside inflation surprises, the central bank might have no other choice but to deliver another sizable 75bps rate hike. The Czech National Bank was trying to make a dovish turn by keeping its policy rate on hold in August – the market continues to see room for a small rate cut, but only in a few months. Stay tuned!
Chart at a Glance: CNY Weakness Continues*
Source: Bloomberg LP
USDCNY – Exchange rate for U.S. Dollar/Chinese Yuan
Related Insights
IMPORTANT DEFINITIONS & DISCLOSURES
This material may only be used outside of the United States.
This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck ETFs, please visit our website at www.vaneck.com.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.