USD strength threatens EM

Emerging markets are under threat from a strengthening US dollar, according to Riccardo Ronco, Head of Technical Analysis at Aviate Global.

Looking at a chart of the USD Index plotted against an emerging markets equities ETF, Ronco notes how the two are inversely correlated and, given he is a strong USD bull, asks if emerging markets will be the “first victim” of USD strength.

Ronco is not alone. Over a year ago, George Magnus, Senior Economic Adviser at UBS, warned that a strong USD could bring about an emerging markets crisis:

“It seems complacent to imagine that the capital flows that have poured into emerging market real estate, local currency bond and equity markets, and piled up in their central banks, will be benign when they reverse as the US dollar appreciates. If the idea of a strong US dollar becomes more widely shared, this is likely to be a trigger of financial instability, much as it was in the previous two bull market cycles.”