FOMC statement from an EM perspective

Worth highlighting in the FOMC statement overnight was the removal of the reference towards ‘global economic and financial developments continue to pose risks’. The statement suggests Fed’s concerns over global economic and financial risks have eased. Fed believes the external environment largely improved and consequently they will not be in a rush to hike rates in June.

Investors hence have no immediate reason to institute aggressive or sizeable long USD positions or to curtail long EM currency or rates positions. Indeed, as inflation rates in higher-beta EM continue to decline (Russia, Brazil etc.) there is every reason for local currency bonds to continue performing well.  The substantial gains seen in recent weeks should persist.

"Tonight’s FOMC statement provided no immediate reasons to abandon long EM asset positions. The outlook for Fed rate hikes remains sanguine and data dependent. The FOMC left the door only slightly open for a June rate hike, which means that sentiment towards EM should not deteriorate in the short term." notes Commerzbank in a report.

EM Asian currencies are likely to extend gains in the coming weeks but remain vulnerable to strong economic data of the U.S. and any hawkish commentary from Fed’s top officials.