This month, Daniel Rico and Daria Parkhomenko sit down to discuss the relationship between US financial conditions/EM credit spreads and EM FX.
- The easing of global financial conditions and the ample liquidity provided by the Fed and other central banks have driven a large divergence between financial asset prices and the real economy, with the global hunt for yield resulting in EM FX appreciation in Q4 2020.
- With financial conditions already very easy by historical records and EM credit spreads getting tighter, this raises questions about the sustainability of EM FX appreciation. Thus, in this podcast, we discuss the relationship between US financial conditions/EM credit spreads and EM FX.
- Based on our analysis, in the event of a sudden tightening in US financial conditions driving EM credit spreads wider, we would expect commodity producers, in particular LatAm, to underperform currencies which are less sensitive to changes in US financial conditions (e.g. Asia EM).