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US: Delay in Fed lift-off giving rise to temporary reversals - MUFG

FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the push back in Fed rate hike expectations following the release of the disappointing non-farm payrolls has triggered relief rallies for commodity and emerging market currencies in the near-term.

Key Quotes

“Currencies which have been the hardest hit in recent months are staging the sharpest reversals such as the Indonesian rupiah and Malaysian ringgit both of which have increased by over 2% against the US dollar overnight. While the relief rallies could still run further in the near-term, we remain sceptical over the sustainability of the reversals.”

“The Fed still remains on course to gradually tighten monetary policy and the outlook for economic growth in emerging economies is deteriorating. It was highlighted in the release yesterday of the IMF’’s latest World Economic Outlook report. The report revealed that the IMF has lowered their outlook for global growth expecting a weaker expansion of 3.1% for this year and 3.6% for next year. Downside risks to the world economy were also described as appearing more pronounced.”

“The IMF described weakness in emerging market currencies in particular the sharp declines in the currencies of commodity exporters as part of the natural adjustment process to differential growth rates that flexible exchange rates promote. The IMF suggested that it should be associated with growth next exports.”

“However, the IMF did caution that large depreciations carry the risk of negative balance sheet effects with a notable pressure point being offshore foreign-currency borrowing by emerging market corporations. In these circumstances, we continue to expect commodity and emerging market currencies to remain under downward pressure beyond the near-term relief rally.”

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