FX performance around EM current account rebalancing – Goldman Sachs

Research Team at Goldman Sachs, suggests that emerging markets FX have initially underperformed and later outperformed as current accounts (CA) adjustments have taken place.

Key Quotes

“Since 2010 as EM current accounts have adjusted (typically from deficits) towards sustainable levels, currencies have tended initially to underperform their peers, but this gives way to later outperformance. The INR, IDR and RUB have gone through this cycle and the bulk of outperformance is likely behind us. Brazil is currently undergoing the same process and should see more stable FX performance, provided the overshoot into overvaluation is not excessive.

South Africa, Colombia and Turkey have more rebalancing to do. Countries currently undergoing adjustment are potential candidates for improved performance once further progress on rebalancing is achieved: these include South Africa, Colombia and Turkey. These economies still have an internal imbalance to correct. Inflation is still running above target and there has been a limited real import adjustment in South Africa and Colombia.

Terms of trade and monetary policy divergence likely to determine who moves ahead. Commodity terms of trade divergence should favour Colombia over Turkey and South Africa. Monetary policy divergence between central banks in Colombia and South Africa (hiking rates) and Turkey (cutting rates) could also contribute to diverging rebalancing trajectories and FX performance.”