EM is likely to come under greater pressure - BBH

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, argues that whether the Fed hikes in March or May makes little difference in the long run.  What matters more is that the markets are not fully pricing in the risk of more than two hikes this year.  When that repricing takes place, EM is likely to come under greater pressure, adds Chandler.

Key quotes

"Recent strength in the US economic data and hawkish Fed comments has led the market to price in another 25 bp hike this week.  Whether the Fed hikes in March or May makes little difference in the long run.  What matters more is that the markets are not fully pricing in the risk of more than two hikes this year.  When that repricing takes place, EM is likely to come under greater pressure." 

"Furthermore, technical indicators for many of the EM currencies suggest overbought conditions.  With the technical largely lining up with the fundamentals, we believe further EM weakness will be seen in the coming days."

"Whatever the pace and scope of Fed tightening is, we still believe it is very important for investors to continue focusing on the fundamentals and also on hedging out currency risk whenever feasible.  Individual country risk must be monitored closely.  We believe investors are being too sanguine on EM, as the current rally is being led by MXN, BRL, and ZAR, all of which face heightened risks."