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Home › Forums › Member Trades › Long Form Discussions › The Bearish EM Thesis
The main near term risks in the market have shifted from Greece to China. The SSEC has already been bloodied up, and recently the PBOC did re-pegging of the Yuan to the dollar, significantly weakening it.
Here’s why this matters.
The changes in the exchange rate makes Chinese exports more competitive vs. other emerging economies.
This may force other EM countries to weaken their currencies against the dollar to make sure their export economies don’t get hit.
So far it’s “normal” within the currency war we’ve been seeing for this too happen.
The problem is if the dollar continues to remain strong accross the board, it’ll continue to hurt energy/materials stocks.
And… much of the EM debt is denominated in the dollar which could lead to further pressure on these countries as they won’t be able to make payments and may have to float their currencies. This is what happened back in 1997 during the Asian financial crisis.
I don’t think it’ll play out the same way in 1997, and much of this macro story is already priced in– look at how far EEM, EDD (EM Debt), FXI, XLB, XLE are off their highs already. The narrative is kind of obvious.
Here’s some more thoughts on this from another perspective: http://markdow.tumblr.com/post/125701757800/why-emerging-markets-wont-crash
Apparently, the Fed is aware of this. Here’s a quote from today’s minutes:
in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook. Some participants also discussed the risk that a possible divergence in iterest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.