Emerging markets currencies are benefiting from the U.S. dollar’s disappointing performance this year, but even if the dollar rebounds, that move is expected to be gradual, indicating emerging currencies can whether incremental dollar strength.
European emerging market currencies like the Polish zloty, Hungarian forint and Czech koruna, which benefited from their close ties to the euro currency and ongoing growth in the Eurozone, were among the major contributors to emerging market bonds.
Emerging market fundamentals, like growth, debt stock, real rates and policy flexibility, all remain at a favorable starting point relative to developed economies going forward.
“Higher rates are, in fact, more likely to impact hard currency emerging markets fixed income sectors, although it is also important to remember that global monetary policy is still easy,” said VanEck. “The Fed’s balance sheet will shrink marginally in 2018, while the European Central Bank’s and Bank of Japan’s will continue to expand. Nevertheless, in a portfolio context, an allocation to local currency bonds may provide needed diversification against rising rates.”
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