If there is consensus on any single trade these uncertain days, it is that the dollar will continue rising, up 23 per cent since June, albeit with some volatility. Equally, there is agreement that an ascendant dollar will only aggravate the negative circumstances of emerging markets. “2015 may turn out to be the year of localised emerging market currency crises,” notes Stephen Jen, of SLJ Macro in London.
Less alarmingly, JPMorgan economists recently noted: “Many emerging markets are hobbled by some combination of depressed corporate profitability, excessive private sector leverage, tight financial conditions and poor governance,” to which add fears of capital outflows.
There is a lot of history on the side of the pessimists. Many emerging market corporates set aside the lessons of history and borrowed cheap dollars a few years ago, even if they lacked dollar revenues. They assumed that a rise was improbable — given that one of the points of quantitative easing in the US was precisely to weaken the dollar.