Fixed Income

EMD Relative weekly notes: Week Ending June 7, 2019

06/10/2019

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

While a trade war is negative for fundamentals, if it leads to a weaker USD as a result of higher odds for Fed rate cutting, we think emerging market debt can become an attractive opportunity.

Evidence from this week is reinforcing the notion that the weight of events is leading to a weaker USD. What is important is the rate of change for USD versus rest of world. Figure 1 shows the significantly faster drop of two-year US rates versus Germany, which serves to summarize that US growth has far more to fall in a negative scenario than does the already-moribund Euro area.

Figure 1

EMD-Blog-6.10.2019-Image-1.jpgSource: Bloomberg. Chart in upper left depicts the yields of 2-year US governments and 2-year German bunds for the 12 months ending June 7, 2019.

The weak jobs number on Friday coupled with trade developments is merely reinforcing what was already an incipient trend towards a weaker dollar, as shown in Figure 2.

Figure 2

EMD-Blog-6.10.2019-Image-2.jpgSource: Bloomberg. Chart depicts the DXY Dollar Spot Index for the 12 months ending June 7, 2019.

The last period of a fairly meaningful drop in the dollar was 2017, when the DXY fell from about 103 to 90—a nearly 13% drop. That year, dollar returns were around 10% and local EMD Index returns were just over 15%; of course, this is purely for historical reference.

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.