Russia/Ukraine Conflict Creates Sharp Divergence Between Latam and CEEMEA FX

• Last year, the significant rise in inflationary pressures has resulted in aggressive hikes by EM central banks (CEEMEA/ Latam).
  • Most of the effort done by EM policymakers was to limit the downside risk in the domestic currency as a depreciating currency keeps supporting inflation expectations.
• Hence, investors were curious to see in the beginning of this year if the '2021 effort’ will payoff in 2022 with EM currencies consolidating significantly higher despite Fed preparing for hiking.
• However, the Russia/Ukraine conflict generated a sharp divergence between Latam and CEEMEA currencies (CEEMEA FX have been very sensitive to the geopolitical uncertainty).
• While momentum on Latam currencies has been strong since the beginning of January, with Latam FX gradually converging back towards their 'fundamental' value, CEE FX were sold off aggressively in February/March (before retracing higher in the past two weeks) and continue to trade significantly below their ‘fundamental’ value.
• BRL has been the best performing currency among the EM world since the start of the year, up nearly 13% against the greenback, followed by the COP (+8%).
• On the other hand, TRY has been the worst performing currency (after RUB), mainly driven by the CEEMEA ‘elevated sensitivity’ to Russia and the ‘dovish’ CBRT.
• CEE FX have also remained weak this year, with PLN being the weakest performer of the region down over 5% against the Dollar.

Source: Bloomberg/MNI