FX strategy: Local knowledge is a global advantage
A wobble in China, a rapid sell-off in global equities, a flight to the safe haven of government bonds and the unwinding of carry trades were all evidence of a change in investors’ risk appetite starting in February and going through into March. The moves showed many things, including the interdependence not only of various currencies but also different asset classes. For a brief period, the path of global equity markets seemed to be dictated by what was going on in an intraday basis in spot sterling/yen.
Ultimately, the increase in risk aversion might well prove only a small blip in the larger picture; for the moment, it seems that liquidity has not left the table. But what has clearly happened is that investors have called into question various countries’ growth rates, especially those considered as emerging markets. There are some who believe that claims of local knowledge are more than a mere advertising sound bite but rather the key to understanding more fully what is driving global financial markets.
This year’s emerging market shock failed, at least for the time being, to take hold to anywhere near the same extent as previous crises have. Around a decade ago, the developing markets were highly dependent on capital from the G7 countries. It was this G7 capital inflow that helped maintain their pegged currencies and assisted with the creation of export industries.
But in the late 1990s there was a turnaround in the state of emerging market monetary policy. A series of reforms have meant that many of these emerging markets have established the basic fundamentals needed for monetary stability, which has allowed them to benefit from their position as net exporters of commodities.