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Uncertain outlook for emerging market FX until Fed hikes complete

Disagreement over where US interest rates are going has split opinion on overall prospects for emerging market currencies.


The results of HSBC’s latest emerging market sentiment survey, conducted between late January and early March, would have made positive reading for any investors with an interest in some of the less heavily traded currencies.

While respondents to the survey expressed concern at the prospect of rate hikes from developed market central banks, they were extremely bullish on emerging market FX.

There are signs that the storm is passing, as reflected by different volatility measures subsiding
Paul Mackel, HSBC
Paul Mackel_960.jpg

Some 67% expected EM currencies to appreciate over the next three months, up sharply from 22% in the December 2022 survey.

With elevated risk aversion, the downward pressures on EM FX might have been expected to be more acute. Lower US Treasury yields should be net positive for EM FX, but at the same time heightened volatility and risk aversion were clear challenges.

“Nonetheless, there are signs that the storm is passing, as reflected by different volatility measures subsiding,” says Paul Mackel, global head of FX research at HSBC. “If we are right in this thinking, the next phase of the USD decline is unfolding and an acceleration of portfolio inflows would improve the prospects for a number of EM currencies.”