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Keep calm and carry on across EMs after a challenging start to 2024?

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

It has been a tricky start to the year for emerging markets (EM) with underperforming cross-assets (bar EM domestic rates), which some may perceive as puzzling. This is a different path to how EM cross-assets performed in 2023. Back then, there was a stronger dose of optimism permeating with the broad USD struggling, less fear of the Fed and hopes about China’s re-opening. Those reasons to be more upbeat then are different now when thinking about the Fed and China. The Fed’s recent pivot and suggestion that rate cuts could be on the cards is obviously helpful for the EM complex. Yet, this is not a panacea alone for EMs.  A key question is how much EM central banks proceed with their policy rates in the months to come. If the Fed and other DM central banks proceed slowly, then the “EM rate cutters” could move cautiously, in our view.

FX views

The broad dollar (DXY) index has gained a little ground since the recent strong US payrolls report but has failed to build on momentum since earlier last week. Politics and geopolitics have been important drivers for EM FX since the start of the year, particularly in the CEE bloc. 

Week in review

Czech Republic surprised the market with a 50bp rate cut to 6.25%, while in Poland, the NBP left key rates unchanged. Meanwhile, in Egypt, inflation dropped to 12-month low of 29.8% y/y amid favourable base effects. 

Week ahead

EM interest rate decisions are expected from Romania (MUFG and consensus: on hold at 7.00%) and Russia (MUFG and consensus: on hold at 16.00%). January inflation data is expected in Poland, Romania, Russia and Saudi Arabia Q4 2023 GDP data is also expected in Romania, Hungary and Poland.

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

EM securities attracted around USD35.7bn in January 2024 - equity and debt flows were -USD6.9bn and +USD42.7 bn, respectively.