Global Markets Update: Emerging Market Currencies Under Pressure

Our overriding theme of emerging market (EM) currency weakness continues to pay off, with our least-favourite currency, the Turkish lira, hitting all-time lows this week, and other major EM units also coming under fire, including the Argentine peso, South African rand, and Russian rouble.

With major support being broken for the TRY and RUB, the ZAR on the edge, and the ARS unofficially devalued and looking wobbly, further weakness looks likely. Interestingly, while pressure on EM currencies had previously been closely tied to rising US Treasury yields over the past six months, the depreciation during this week coincided with a drop in US 10-year yields (to 2.75%, from 3.00% at the beginning of January).

Instead, investors have been focused on a contractionary China purchasing managers' index (PMI) figure, which has put the spotlight on weakening Chinese economic activity and its potential negative impact on emerging markets.

In general, the recent sell-off is part of a longer-term trend that we have been highlighting for years of EM re-pricing lower, as developed markets (DM) revive and China slows down. The DM over EM equity ratio continues to hit multi-year highs alongside the incipient rally in the US broad trade-weighted dollar, and we expect these trends to continue over a multi-year horizon.

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This Week's Trivia Question

Last week's trivia question was as follows: what London landmark celebrated its 255th anniversary [that] week? And what is its nominal past connection with a nearby building now occupied by the Nationwide Building Society? The answer to the first part is the British Museum. The answer to the second part is that the nearby building once contained the long-since abandoned British Museum tube station, which is among dozens of disused stations on the London Underground.

This week's question is as follows: This week marked the 44th anniversary of what transformational event in international travel? And this week also marked the 30th anniversary of the release of what technological creation that would transform the way we live?