Emerging Markets. The Effect of Rising US Dollar and Rising US Rates!

Dear Reader,


The current level of the target for Federal Funds Rate is 2.25%. The Federal Funds Rate is the main policy tool and target of the Federal Reserve, the Central Bank of the United States and undeniably the most powerful Central Bank in the world which exerts great influence over financial markets globally.

Currently the EUR/USD exchange rate is 1.14. The US dollar keeps appreciating against all major currencies and especially against emerging markets currencies as the Russian Ruble, Turkish Lira, Indonesian Rupiah, Argentine Peso, Indian Rupee, Chinese Yuan and others. Since many of these emerging markets countries and their corporations have borrowed in United States Dollars the rising USD rates and appreciating USD threaten to increase emerging market real debt exponentially and cause many of the above countries to go bankrupt.

Will there be a LARGE emerging markets crisis as in 1997? No. Why? Because many of the above countries have low Debt/GDP levels and their economies are much more sound, relatively larger and more flexible than in 1998. Brazil, Russia, India and China's economies are much larger and with flexible exchange rates to the United States dollar which provided an adjustment cushion which would soften any exorbitant blow to their economies. Will there be a smaller crisis in emerging markets? Yes. Why? Because as sound as emerging markets economies are still the appreciating USD, rising dollar rates and rising emerging market debt will cause pain in the economies of Brazil, Russia, India, China, Turkey, Indonesia, Argentina and others.

China - a wild card? But still there is China. The total debt to GDP ratio is 240% compared to 140% before 2008. The Chinese government has much less room to maneuver this crisis around, There is also the shadow banking sector in China which worries many analysts, Nobody really knows what is the total debt in China due in part to unreliable statistics. There have been studies that if GDP growth in China slows below 6% the Chinese workers from smaller cities will not be able to find jobs and move in the bigger cities. The Chinese economy will not be able to quickly replenish itself if growth falls below 6%.

So in short, if there is global crisis soon, I would bet that the trigger and fundamental reason will be an economic crisis in China!

Disaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich