(Bloomberg) — A cycle of widespread aggressive rate increases in emerging markets looks to be reaching its peak, according to Goldman Sachs Group Inc. strategists.
Over the next three months, the proportion of authorities still tightening policy in developing nations could drop closer to 50% from about 70% currently, the strategists said, citing an in-house model.
Traders on Thursday ramped up wagers of more aggressive U.S. rate increases after inflation again exceeded expectations. But Goldman Sachs said domestic fundamentals were set to play a bigger role in emerging-market monetary policy than spillovers from tightening in developed countries.
“While inflation dynamics remain hawkish across most jurisdictions, relative FX strength and weakening growth momentum in some key ‘early hikers’ are likely to argue against monetary policy moving too far beyond restrictive territory,” the strategists, including Kamakshya Trivedi and Caesar Maasry, wrote in a report.
The next couple of months would also likely bring a divergence in policy among emerging-market central banks, they said. Tight monetary policy in Latin America and some parts of Central and eastern Europe, the Middle East and Africa meant that the probability of less hawkish action down the road had increased.
Meanwhile, easy monetary policy in Asia was likely to be tightened eventually as domestic and global pressures build. Asian currencies such as the Indian rupee have fallen against the dollar so far this year, whereas Brazil’s real is among those leading gains after its hiking cycle.
“For now, our active trade recommendations remain focused on harvesting risk premia at the very front end of some of the ‘early hiker’ EM curves, which could benefit from any moderation in inflationary pressures as the impact of the fast and sizable tightening to date starts to manifest in price-setting behavior.”
The analysts recommend so-called bond curve steepeners in Brazil and South Korea, while seeing flatteners as the better trade in markets “likely to see an acceleration in monetary policy normalization in the coming months.” These include Indonesia and India.
