EM: Global liquidity backdrop has turned supportive - BBH

Research Team at BBH, suggests that the global liquidity backdrop has turned supportive for EM in recent weeks. 

Key Quotes

“However, we think that EM policymakers will continue to prepare for a less friendly global growth outlook in light of the Brexit vote as well as ongoing downside growth risks from China as well as resurgent Fed tightening concerns.  As such, easy monetary policies are likely to prevail until the global outlook becomes clearer.

We believe EM policymakers are starting to get more concerned about currency strength, with action already being taken by some countries. As in the case of EMEA, virtually all of the central banks in the Asian region are in dovish/neutral mode.  This is due in large part to the slowdown in China and the lack of any persistent price pressures in most countries there. 

China - The People’s Bank of China has been on hold since October 2015, when it cut its policy rates by 25 bp.  CPI rose 1.8% y/y in July, the lowest since January and well below the targeted 3%.  The economy continues to slow at a manageable pace, but the PBOC has signaled that it remains reluctant to cut rates further, preferring what it calls “prudent” monetary policy.  Growth has slowed or stayed steady for six straight quarters and the 6.7% rate posted in both Q1 and Q2 is the lowest since Q1 2009.  If the slowdown remains modest, we think PBOC will not ease further for fear of encouraging debt-fueled growth.

The PBOC has allowed a greater role for market forces in determining the exchange rate.  Despite this, the yuan remains a heavily managed currency and FX policy remains a black box.  Foreign reserves appear to have stabilized around $3.2 trln over the last few months, as capital outflows eased.  For now, we think policymakers favor a broadly stable yuan and we see low risk of another devaluation.”