CoreMacro

Special Report

Odds are rising that the trade-weighted US dollar will roll over and depreciate sometime next year. However, USD weakness will not be due to stronger ex-US growth. Rather, economic conditions in China and Europe will continue to underwhelm. Therefore, a weaker US dollar will not boost prices of cyclical commodities. That said, when we change our view on the US dollar, we will upgrade our stance on EM financial markets – especially EM domestic bonds.

The threat of import tariffs and US growth outperformance versus the rest of the world will continue supporting the US dollar rally over the near term. Nevertheless, the Trump administration’s medium- to long-term goal will be a US dollar devaluation to boost the country’s manufacturing competitiveness. We will recommend upgrading EM stocks and bonds when we downgrade our US dollar view.

In absolute terms, Chilean markets and the currency will fall given a strengthening trend in the US dollar and weak global trade. However, Chile’s economy can withstand the global trade slump relatively well due to substantial monetary easing at home, which will help Chilean markets outperform EM peers. Moreover, a favorable and improving political backdrop and attractive valuations will benefit Chilean equities and the peso versus their EM counterparts.

Turkey has a path toward sustained disinflation. But that will require tight macro policies for an extended period. The question is, will the authorities tolerate the consequent growth slowdown, even a recession, and surging unemployment, as the necessary cost to break the back of inflation?

Special Report

EM credit markets have recently defied the selloffs in EM equities, currencies, local currency bonds, and commodity prices. Such a decoupling is unusual. Resilient US growth and Fed easing are not sufficient to justify very low EM credit spreads.

As the odds of a Trump victory increase, there are indications that the “Trump trade” has commenced in global financial markets, with negative short-term implications for EM. In short, the US dollar will strengthen, and US bond yields will rise in the lead-up to and after the election if Trump wins. In response, EM countries’ currencies will depreciate, and their fixed-income and equity markets will suffer over the coming months.