The ramping up of the US Fed’s hawkish rhetoric has turbocharged the dollar’s appreciation against EM currencies, with most falling by 2-6% against the greenback since the start of the month. Reluctant to allow currencies to slide too rapidly, some EM central banks (particularly in Asia) are likely to respond by ramping up FX intervention. And at the margin, the sell-off will result in monetary policy being tightened a bit more aggressively than we had previously expected. We have revised up our forecasts for interest rates in the Philippines and Indonesia in recent weeks, and we wouldn’t be surprised to see larger rate hikes in Korea, India and Mexico too. As it stands, tightening cycles appear to have drawn to a close in Brazil, Poland and Czech Republic, but a period of intense currency weakness could also prompt central banks to restart hiking cycles in these EMs.
Note: We’re holding an online briefing about the potential risks around the Brazilian presidential election on Wednesday, 28th September at 10:00 ET/15:00 BST (Register here).
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