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Emerging Markets: Next in line

Wednesday, January 23, 2008

As the global equity markets are in a free fall, the risk of Emerging Markets turmoil has clearly increased. It is notable that it looks as if global investors – rightly or wrongly – are loosing faith in the rest of the world’s ability decouple from the US slowdown. For example, this is visible in commodity prices, which have fallen somewhat overnight. Crude oil is now at a five-week low.

The continued rise in risk aversion is likely to hit high beta currencies such as TRY, ZAR, ISK, RON and HUF mostly. Furthermore, with commodity prices beginning to fall also, it is likely that the Latin American currencies – particularly BRL and CLP – are likely to come under further selling pressure. In general we see most risk in the EMEA currencies where external imbalances are large.

It should be noted that a lot of investors have been betting on the notion that Emerging Markets were “special ” and could act as a “safe haven”. That view might now no longer be the dominant one, and hence the Emerging Markets’ FX markets could now cave in to the selling pressure.

Posted by MOHAMED SAID at 7:46 PM  

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