A complicated relationship? Emerging Markets Debt Hard Currency and the US dollar
The US dollar influences the EMD Hard Currency asset class, but the relationship is complicated. What are the underlying drivers of the relationship?
6 minute read
Key takeaways:
- US dollar (USD) moves are generally considered to have a significant impact on EMs, but we believe not only has the direct impact on the Emerging Markets Debt Hard Currency (EMD HC) asset class declined in recent decades, but the impact is generally misunderstood.
- Emerging markets (EMs) have become less vulnerable to USD fluctuations due to increased local currency debt issuance, larger foreign exchange reserves, more credible economic policies, and shifted trade linkages, particularly towards China.
- While a stronger dollar generally coincides with wider credit spreads, what really matters for EMD HC is the underlying drivers of the US dollar moves. In particular, understanding the balance between the EM-US growth differential and financial conditions is likely to give a better guide.
EMD HC in a nutshell
EMD HC debt is an asset class denominated mostly in US dollars (USD), although some euro-denominated bonds are included in the universe, albeit outside typical benchmarks. Around half are investment-grade issuers, and the universe is also evenly split between net commodity importing and exporting countries.
There are more than 80 countries spread across the economic development spectrum, providing ample diversification in terms of credit risk. This translates into a fundamental resilience at the asset class level, as most global shocks are positive for some countries while negative for others. The fundamental diversification in terms of credit risk is consequently very high, providing an anchor for credit risk over the medium term.
Most of the somewhat more fragile high yield (HY) countries are in IMF programmes, with funding being conditional on programme execution, providing a strong policy anchor for the coming years. Default losses are expected to be close to zero after a round of EM restructurings completed in recent years after the pandemic.
All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect. The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Whilst Janus Henderson believe that the information is correct at the date of publication, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information.
6 minute read
Key takeaways:
- US dollar (USD) moves are generally considered to have a significant impact on EMs, but we believe not only has the direct impact on the Emerging Markets Debt Hard Currency (EMD HC) asset class declined in recent decades, but the impact is generally misunderstood.
- Emerging markets (EMs) have become less vulnerable to USD fluctuations due to increased local currency debt issuance, larger foreign exchange reserves, more credible economic policies, and shifted trade linkages, particularly towards China.
- While a stronger dollar generally coincides with wider credit spreads, what really matters for EMD HC is the underlying drivers of the US dollar moves. In particular, understanding the balance between the EM-US growth differential and financial conditions is likely to give a better guide.