Extract from our "EM’s Bad Case of QE Hangover" research paper, published on the 7 January, 2015. Register for a free trial* to access the full paper.
While the dollar is not necessarily under-valued, it is under-owned. The cyclical out-performance of the US economy and the Fed’s normalization stance may help propel the dollar higher, but investors need to be aware of the very large structural short dollar positions in the world, and how this could lead to a sharper and larger dollar appreciation in 2015 than some may have in mind. We are particularly concerned about many of the EM currencies. Over the past decade, EM has accumulated very sizeable dollar liabilities: the governments, corporations, banks and households in EM have dollar liabilities that will become a problem as the dollar rises. Regarding the prospective dollar appreciation, we see the Fed as the ‘spark’ and the cumulative capital flows into EM in the past decade as the large and dry ‘kindling’. At some point, there will likely be ‘breakages’ in some EM economies, which in turn could propel further depreciations in their currencies. What happened to the Russian ruble last year, in our view, should not be an isolated event. While we don’t see a global EM financial crisis, we are likely to see localized financial breakages in some other EM economies this year, triggered by the stronger dollar. One gets a hangover only after (s)he stops drinking. In 2015, EM countries are in high risk of experiencing a bad case of ‘QE hangover.’
The full report contains the following sections:
- Globalisation and capital flows
- QE and portfolio flows: pull versus push
- What high dollar liabilities mean in a strong dollar environment
- The sparks and the kindling
- Currency hedging
- Why China will resist devaluing the CNY
- The Fed and fickle capital
- Bottom line
* Access to a free trial of our research is limited to professional investors. Terms & Conditions apply.
Find out more about our research service by clicking on the brochure below:
Apply today for a FREE trial of our research service, and start receiving our insights. A trial of our research will enable you to:
- Establish a robust intellectual partnership and leverage our forward-thinking approach to gain unique, accessible insights into complex market issues, enhancing your investment strategies.
- Access a team of leading FX experts, economists, and strategists to deepen your understanding of the macroeconomic landscape, empowering you to identify potential risks and opportunities.
- Stay ahead of the competition with our expert analysis and insights, increasing the potential for improved investment decision-making and enhanced risk management.
Sign-up for a FREE Trial*
*For professional investors only, subject to terms & conditions. By submitting your details, you consent to your data being collected and stored for the purposes of Eurizon SLJ Capital Limited providing information regarding your enquiry and related services. If you have any questions about your data please contact us at email@example.com
Subscribe to our insights
If you are interested in our content, please sign up below and we will deliver Eurizon SLJ insights right to your inbox.
I consent to my data being collected and stored for the purposes of providing me information regarding my enquiry and related services. If you have any questions about your data please contact us at firstname.lastname@example.org
This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.