USD/EM: Trump fuel rise in US yields threatens EM - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that while the message from FOMC officials so far is that a Dec rate hike is still likely, MUFG would not be surprised to see that view questioned given the huge degree of policy uncertainty over what exact policy direction Trump will initially focus on.

Key Quotes

“But the rise in US yields does point to the potential sharp reversal of some of the popular trades of 2016. One of those has been the re-establishment of carry trades in certain EM FX pairs. As of Tuesday before the election result, the Brazilian real was up 25% versus the US dollar and was by far the best performing LATAM currency in 2016 to date. With BCB focused on tackling inflation fuelled by the plunge of the real in 2015, the yield on offer in a relatively liquid LATAM currency has fuelled appetite for carry. USD/BRL is up 7% since the election result and given the performance year-to-date, further BRL weakness on higher US yields is very likely.”

“The rest of LATAM is also vulnerable. The obvious being Mexico of course but other key countries like Chile or Columbia have links through commodities either to China or energy and from a terms of trade perspective, the Trump victory has altered the clarity on what lies ahead. EMFX turmoil could quickly spread to equity markets and quickly place doubts on the Fed lifting rates in December.”