Ruth, let me start with you. Is this all about real yield?
Absolutely it is. And, you know, it's the hunt for the
real yields and what's going to outperform just before the will.
So that dips into recession. So it speaks to a Monday T Rowe Price.
The big names, Aberdeen's Delta T. A lot of them are basically betting that
risky emerging markets, particularly those in Latin America, still have quite
a bit of juice. And the weather was on the currency saw
it on the bond side, and that's just before global growth tanks in emerging
markets. The outflows basically now.
Why is that? It's important to remember that a lot of
these nations, from Chile to Mexico and even some in Asia like Indonesia, have
really taken on the inflation fight much so not the piece.
So there's still a lot of demand for commodities as well coming out of China.
It's a good recipe for emerging markets to outperform right now.
And Brendan, how much is it to do with just bargain hunting at this point?
Yeah, I think that's a that's a really big component of this OEM kind of
currency rally. I think the valuations are still
relatively attractive in the E.M. space, and that's certainly attracting
foreign investors back towards the emerging markets.
And it's not only just currency that that's looking for foreign investment,
but it's also foreign currency denominated assets and the sovereign
debt space also on equities. So it's a component of valuations being
relatively attractive across the emerging market asset class in totality.
So are you looking at emerging market currencies are strengthening against the
U.S. dollar or some sort of outperformance?
And what are your best bets at this point?
So we're certainly forecasting emerging market currency strength, but within
that strength, we're looking for emerging market currencies to outperform
relative to G10 currency peers and subsector of emerging markets.
We're looking for Latin America to actually outperform within the emerging
market currency context. And this kind of goes back to attract
the valuations. It also goes back to elevated real
interest rates. We're also looking at some countries
specific developments where maybe local politics are improving or at least
somewhat stable. So it's a combination of external
factors, but also maybe more idiosyncratic developments that could
lead to Latin American currencies outperforming going forward.
What about the U.N. as an A.M.
anchor? Given that we continue to see, you know,
weaker and patchy data, a narrowing rate differentials is the potential potential
for more of a drag. The.
I think there is potential for a bit of a drag coming out of China.
We're starting to see the economic rebound post 0 Covid start to mature a
little bit and maybe some of the rebound is not as strong as maybe we would have
initially liked at this point. So maybe the E.M.
Asia rally that we've seen over the last couple of months, maybe that's starting
to lose a little bit of steam. But nevertheless, if we're forecasting
broad dollar depreciation, that's something that can at least support
the Chinese yuan in emerging market Asian currencies a little bit more
broadly. But I would say that we do expect EMEA
Asia to underperform within the emerging markets as some of the this theme from
the China rebound does start to fade a little bit.
Varies from what you've been looking at. What are you seeing as on the top?
AM currency picks at the moment in terms of what's being really traded by funds?
Yeah, absolutely innocent attached to this a little bit earlier as well.
It's very much still a commodities driven story.
So in Latin America, a lot of tons up bullish on the likes of the Mexican
peso, the Brazilian real Chilean peso. And in Asia, although less so than Latin
America, it's about the Indonesian rupiah.
It's about the Indian rupee. Now, these currencies, remember, were
absolutely clobbered last year when the dollar was skyrocketing to record highs.
But, you know, they've been on a tear this year and that story has sort of
reversed and U.S. dollar exceptionalism wanes.
And some of them are even posting double digit gains as this commodity story
continues. And then you talk about some of those
idiosyncratic risks. Of course, the Turkish lira is a whole
different story, but you guys and Wells Fargo were actually thinking that either
one would retain office. Yes, absolutely.
That was our base case scenario leading into the election.
And it's still our base case now. I would probably say the probability of
IRDA on retaining office is probably much higher now that we have the first
round of voting completed. But absolutely, that was our base case.
We're forecasting a pretty sharp near depreciation as a result of IRDA on
remaining in office. And we think actually as we get past the
runoff election and a couple of weeks, that selloff will start to materialize
and that could push to lira to all time record highs against the U.S.
dollar. OK, more idiosyncratic news, Argentina
and we're expecting those emergency measures also in the key rate to reach,
what, 97 percent? What's happening there?
So really, it's a combination of Argentina not being able to get out of
its own way. Argentina has fiscal related problems.
It also has an inflation problem. And that's kind of forcing the central
bank to raise interest rates as aggressively as they are.
The problem with Argentina is really political and we're gonna have an
election later this year where maybe some things on the margins start to
change. But nevertheless, I think we're looking
at a situation where because the central bank has run out of F X reserves, the
credibility has essentially been lost from a policymaking perspective.
The Argentine peso is probably going to be devalued post-election.
So we're looking at a scenario where the Argentine peso again underperforms the
entire currency complex, not just within the emerging markets and again reaches
all time lows against the US dollar.