Dollar’s rise slowing down
A look at right side of the chart below will show you that the US dollar is slowing down. The PowerShares DB US Dollar Bullish ETF (UUP) witnessed its peak of the past one year on the first trading day in 2017. Since then, the UUP has declined 2.5% to January 20. This is in contrast to a 5.4% rise seen in the ETF from November 8 to December 20.
The rise in the dollar after the election of Donald Trump was primarily attributable to his views on boosting infrastructure spending and tax cuts. A rise in the dollar is a common factor which often negatively impacts stocks in emerging markets. This is due to the fact that much of the debt owed by corporations from these countries is denominated in the greenback. A northward move in the dollar makes these debts more expensive to service. This weighs on corporate revenues and is reflected by a downward movement in stock prices.
The dollar is also expected to continue to strengthen in a rising interest rate environment in the U.S. A rate hike in the U.S. in December, even though expected, has strengthened the dollar, thus further pressuring emerging market currencies.
In this manner, emerging markets are under a two-fold pressure from monetary and possibly fiscal policy announcements from the US.
Dollar to guide emerging markets in 2017
Given that the level of the dollar is vital to emerging markets, combined with the fact that it accommodates several policy announcements and political changes all into one value, it will remain crucial for investors in emerging markets (VWO) (IEMG) – particularly in a year like 2017 given the rampant uncertainty.
Though the dollar is expected to remain strong, its upward march may begin to slow. This would be crucial for investors in crude oil (USO) because a more benign dollar will help support prices at a time when oil producing nations in emerging markets have resolved to cut production.
With the Trump administration officially in business now, there will be a lot of focus on government announcements in the first 100 days. Short-term volatility in emerging market instruments amid more populist oriented announcements can therefore be expected. But a firmer trend will take hold as the government settles in and markets take stock of its ‘honeymoon period’ announcements.
In the next article, let’s take a look at some of the most important emerging markets to watch in 2017 in light of the Trump administration.