US jobs data provides boost for EM debt and currencies

James Barrineau

James Barrineau

Head of Global EMD Strategy

See all articles

We had recently expressed caution on two of three key investment themes for the emerging market (EM) debt asset class. Chinese yuan (CNY) stability had been threatened by a steady but quiet depreciation, and major central bank support  wobbling with hawkish talk from the Federal Reserve (Fed), though oil prices and fundamentals continued to be steady.

All three will now be flashing green for investors absent new macroeconomic developments. It is notable that even before today, the weekly mutual fund flow numbers remained positive – an indicator for us that the global search for yield was raising the bar for investors to flee the asset class. Friday's developments should add fuel to those flows.

Summer rate hike less likely

Following the weak job numbers (a rise of just 38,000 versus expectations of 160,000), the market-implied probability for a June hike fell from 20% to 4%, and from 52% to 20% for July. The Fed would have a massive task ahead of it to get the market onside for even a July hike given that pricing; possible, but difficult. 

The dollar – key for EM – fell in tandem as two-year yields took their largest tumble in nine months.  In May, the dollar index had climbed 3.5% and returns on the local currency index fell 5.44% - a typically correlated result. 

Unless the market shifts its current stance on the Fed markedly and that boosts the dollar, EM local currency now has a much better macroeconomic environment in the coming months. EM currencies jumped on Friday morning by about 2% on average in response to the US data. 

The CNY follows from the dollar. Though the Chinese insist the currency is managed against a basket, its performance has become a mirror image of the dollar just like the broader EM universe.  On Friday morning the CNY was at 6.58 prior to the jobs number and at the time of writing is at 6.55 – about a 50 basis point appreciation.  So it is fair to conclude that the weaker dollar reduces China tail risk fears, which already seemed to be muted.

Better environment for EM debt

So, what could go wrong with what seems like a sunny scenario?  Perhaps an overall risk-off sentiment, and indeed US equities fell as the economic growth perception shifted to a more negative outlook.  However, the fall was not very sharp and the VIX volatility index is up a mere 0.24% as of the time of writing. So, for now, we are managing our EM exposures to reflect a much more robust environment for EM debt, particularly for local currency.


The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.


This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.


Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.


Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).


Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at or on request should you not have access to this webpage.


Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored


The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.