Are Good Times Over For Emerging Market ETFs?

After a banner year, the emerging markets thrived in the first quarter of 2018 too, courtesy of cheap monetary policies, a strong global economy, rising commodity prices, and a weak dollar. The trend seems to be reversing now as the greenback has gained strong momentum, triggering a selling spree in the emerging market currencies.

Notably, the Bloomberg Dollar Spot Index has risen 3.1% in a one-month period while the ICE U.S. Dollar Index, which measures the basket against six currencies, hit its highest level since late December.

The slump in currencies could push inflation higher and force their central banks to raise interest rates, thus ending the emerging markets’ three-year long interest rate cut cycle. This is especially true as Argentina has been the worst hit by a strengthening dollar, which forced the country's central bank to increase interest rates three times in just eight days to halt the peso’s dramatic slide against the U.S. dollar. The interest rates jumped to 40% from 27.25% before the rapid-fire rate hikes.

Turkey also bore the brunt with rate hikes ahead of the presidential elections in June. In addition, bets of a rate hike are increasing in Indonesia after a series of interventions by the central bank failed to stem the slide in the currency to a two-year low. All these rate hikes have led to increased uncertainty on monetary policies of the emerging nations.

Further, China's slowing economic growth and potential credit problems could lift the greenback higher, indicating more pain for the emerging market currencies and their stocks.

Moreover, inflationary pressures in the United States are fueling the speculation for the Fed’s aggressive rate hikes and in turn resulting in an increase in bond yields. This has raised worries over emerging markets, which were the worst hit by the taper tantrum of 2013 that resulted in a huge capital flight. This is because the prospect of faster rate hikes would pull out more capital from these markets, stirring up trouble for most emerging nations.

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