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Path to EM easing in 2024 (and terminal rates)

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

Having risen more sharply than developed market (DM) interest rates during the 2022 global inflation shock, emerging market (EM) interest rates now have further to fall. Several EM central banks have already started to ease with Q3 2023 the first quarter since 2020 when more EM central banks eased than tightened. While this is likely to be the case for some, the fact that several EMa have already started to cut suggests that it is not the case for all. We expect a broadening of rate cuts and a tightening of rate differentials vs. DMs through 2024 (see here).

FX views

EM FX have continued to weaken at the start of the new calendar year. The CLP has been the only EM currency that has strengthened marginally. USD has continued to rebound supported by the resilience of the US economy.

Trading views

Like Fed march pricing we are in a holding pattern currently. During this time relative value trades will become more popular, long PLNHUF is the latest pair to gain popularity.

Week in review

Moody's revised Egypt’s sovereign rating outlook to negative from stable, while Israel's inflation rate edged down for the third straight month, to 3.0% y/y in December, returning to the target range.

Week ahead

EM interest rate decisions are expected from South Africa (MUFG and consensus: on hold at 8.25%), Ukraine (MUFG and consensus: on hold at 15.00%) and Turkey (MUFG and consensus: 25bps rate hike to 45.0  0%). Inflation releases are due out of Bahrain and South Africa.

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 funds saw net weekly outflows worth USD0.3bn in the week ended January 19 – equities and bonds at US0.2bn and USD0.1bn, respectively.