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Fed is a big risk to EM's - ANZ

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 26, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Analysts at ANZ explained that emerging markets are having a tough time.

    Key Quotes:

    "Commodity producers such as Brazil have of course been hit hard by the rout in general commodity markets over the last year. Iron ore, copper, zinc and aluminium are all trading around six year lows; nickel is the lowest in ten years. And oil of course has more than halved in around 14 months. This has hit equity markets, bonds and currencies of affected nations hard."

    "New Zealand and Australia are not emerging markets but they are commodity producers, and commodity price weakness has taken its toll on the NZD and AUD. However, Australasia is fortunately exempt from the other main threat facing emerging markets at present: high levels of foreign-denominated debt."

    "Over the past seven years with US interest rates near zero and liquidity plentiful, the temptation to borrow in USD was strong. But unhedged foreign debt becomes a real problem – and a self-reinforcing one – if the value of your domestic currency against the USD falls sharply. Add to that the fact that the Fed is widely expected to begin a gradual process of monetary policy normalisation next month, and the debt is suddenly looking a lot less affordable.

    Defaults will increase; the question is how contained the fallout will be. While it may get ugly, one mitigating factor is that it is generally well understood who is holding the debt; it has not been securitised and dissipated through markets as subprime debt was before the GFC. Markets can generally handle losses fairly well but they hate uncertainty about who’s going to cop it."
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