The sharp improvement in risk conditions globally over the last few weeks has driven a strong performance for EM currencies since late August. However long it lasts, the current thaw in US-China trade tensions has helped, as has the market’s increasingly warm reception of central bank easing globally in recent. As well, after a strong signal from China in allowing the USDCNY to power above the psychological 7.00 level in early August, the slide in the CNY versus the USD was halted earlier this month and has partially reversed.
Chart: Saxo Bank Global Risk Indicator
Our Global Risk Indicator gives a clear indication of the general improvement in risk conditions, with tightening EM spreads contributing strongly to the improvement. The next key tests for EM arrive with next Wednesday’s FOMC meeting and policy guidance from the Powell Fed. The next and bigger test will be whether the US and China can get trade negotiations back on track or whether the relationship resumes the long-term worsening trajectory.