The lack of any meaningful reaction in EM currency markets to increased speculation that the Fed could raise interest rates this month appears to reflect three factors: a growing recognition by investors that most EMs are now better placed to withstand higher US rates, widespread relief that President Trump adopted a less abrasive tone in his address to Congress last night, and the recent run of strong economic data from most EMs. After hawkish comments from Fed officials this week, futures markets are now pricing in around an 80% chance of a 25bp increase in the Fed Funds rate at this month’s FOMC meeting. This is up from just over 30% a week ago, with most of the move coming in the past day. In the past, such a shift would have caused EM currencies to slump against the dollar. But the reaction this time has been relatively muted. Admittedly, most emerging market currencies are down against the dollar since the since the start of this week. But these moves are small in comparison to previous Fed-related sell-offs. The Mexican peso in particular has strengthened today. •
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