Magnitude Of Tightening Cycles Drives Wedge In EM FX Performance

This monetary tightening cycle has been remarkably synchronised across both the OECD, excluding Japan, and emerging economies, even if there have been differences in the timing and pace. Both Hungary and Brazil have hiked around 12pp cumulatively, the US 3pp and Thailand only 0.5pp.

• The majority of central banks have moved in increments greater than the usual 25bp and so we have seen some slow their pace of tightening either back to 25bp or to smaller but still outsized moves. Australia was one of the first to pivot to 25bp at its October meeting followed by Norway this month, one of the early tighteners. Canada has gone from 100bp in July to 50bp at its last meeting and Poland has slowed to 25bp from 100bp. Brazil and Czech have now actually paused being some of the earliest tighteners.
• Given the amount of cumulative tightening this cycle and the darkening of the global growth outlook, more central banks are likely to pivot over the next few months.
• Asian central banks have been tightening not only to fight inflation pressures but also to support their currencies which have been under pressure forcing a rundown of FX reserves given the rapid Fed rate rises. Even Korea has hiked less than the Fed cumulatively and they began their cycle in August 2021. However, recent FX sentiment has been more encouraging, with broader USD conditions softening.
• In contrast, Latin American central banks not only started increasing rates in 2021 but have moved quite aggressively with Brazil and Chile hiking around 11pp and Mexico at the lower end with 5.25pp. As a result, Latin currencies have been a lot more stable against the USD than Asian ones have, see the chart below.

Source: MNI - Market News/Refinitiv

Fig. 2: JP Morgan currency indices Latin America vs Asia

Source: MNI - Market News/JP Morgan/Bloomberg