EDITOR NOTE: In the current risk-on environment, with businesses reopening across the globe, things look a bit confusing. On one hand, you had many emerging market investors piling into US dollars and treasurys, abandoning a sinking boat for a sinking ship. Now we see the dollar sinking against emerging market currencies. Yet emerging market bonds are not cheap, their curves likely to steepen over time. In short, the dollar decline isn’t going to paint a rosy picture for emerging market currencies. And given the dollar’s debasement, neither does the picture look all the bright for the dollar either.
(Bloomberg) -- Emerging-market currencies will see little reprieve over time even as the reopening global economy eases investor fears and the U.S. dollar weakens, according to strategists at Barclays Plc.
Currencies and government bonds issued by emerging-market countries look too expensive given the challenges they face in tackling the virus outbreak, strategists including Nikolaos Sgouropoulos wrote in a research note June 7.
“The medium-term trajectory for EM FX is still lower and their curves are likely to steepen,” the strategists wrote, referring to expectations of wider spreads between short-term and longer-term government bond yields. “Long-term fiscal sustainability will remain a challenge for some, even under optimistic post-Covid-19 assumptions.”
The MSCI Emerging Markets Currency Index recorded its strongest weekly advance since 2016 last week, with improving economic data and government and central bank stimulus measures helping revive investor confidence. The Bloomberg Dollar Spot Index headed for an eighth straight daily decline in early Asia trading Monday, extending declines in wake of the strong U.S. jobs report Friday that further eroded demand for haven assets.
Barclays strategists said that the risk rally has left 10-year government bonds in Chile, Korea, India and South Africa all looking “rich” relative to their model estimates.
“Despite still-wide spreads to lower risk-free rates, EM local bonds are not cheap given local and global fundamentals,” the strategists said. “Weakened EM balance sheets are set to worsen, with the largest primary deficits in the last 30 years,” the team wrote. Primary budget shortfalls exclude debt-servicing costs and are a gauge of underlying fiscal trends.
Originally posted on Yahoo! Finance