EMD Relative weekly notes: Week Ending February 22, 2019
We have described in past weeks the waning support for the thesis that a strong US dollar will persist or strengthen further. Key to that has been softer US data. Despite that data, the dollar rallied the first two weeks of February. However a combination of continued softness in US data, a firming of convictions that a China trade deal can indeed get done, and less dovish news from the rest of the developed world has conspired to cut short the rally (see Figure 1).
Figure 1 – DXY Dollar Index
Source: Bloomberg. As of February 20, 2019. DXY depicts the US Dollar Spot index. Performance shown reflects past performance, which is no guarantee of future results. The value of investments can go down as well as up and is not guaranteed.
At its peak earlier this month, the dollar was the strongest it had been since the middle of 2017 when it was in the process of falling from its 2016 high. With the dollar then at a still fairly elevated level and US data continuing to come in soft (like this week's durable goods report) EM investors should be cautiously optimistic that a positive liquidity background is intact.
With that liquidity background, we are seeing regular bond issuance from EM corporates and countries, and—as always— market access diminishes significant downside risks to price. Additionally, IMF involvement across a broad swath of countries in Latin America and Sub-Saharan Africa provides investors near-term protection against both significant fundamental deterioration and the need to issue in the market at punitive rates. This week Ecuador, where current yields top 9.5%, became the latest country in this camp.
We can never know the near- or medium-term price direction for EM bonds, but we think the big picture remains supportive of reassuring probabilities of additional gains above other global fixed income alternatives.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.