Optimized Title: "BofA Analysts Predict Strong Performance for Emerging Market FX in Hard Landing Scenario"
Investing.com -- According to analysts at BofA Securities, Emerging Market (EM) foreign exchange (FX) is expected to outperform in a potential hard landing situation, thanks to key shifts in driving factors post-COVID-19. Factors like U.S. terms of trade, the U.S. 2-year swap rate, and China's house prices have become crucial determinants of EM FX performance, replacing previous influencers like global growth and commodity prices. The correlation between U.S. terms of trade and oil prices has strengthened significantly post-COVID, while the importance of U.S. monetary policy and China's housing market on EM FX has also increased. In the event of a hard landing, where the economy faces a sharp slowdown, BofA analysts anticipate support for EM currencies from lower oil prices and a decline in the U.S. 2-year swap rate. However, they caution that a major credit event could lead to a weakening of EM FX despite these potential supports.
Analysis: In simple terms, BofA analysts are saying that Emerging Market currencies are expected to perform well in a hard landing scenario due to changes in key driving factors post-COVID-19. Factors like U.S. terms of trade, U.S. 2-year swap rate, and China's house prices now play a crucial role in determining the performance of EM currencies. This shift has made global growth indicators less significant. In a hard landing situation, lower oil prices and easing U.S. monetary policy could support EM FX, but a major credit event could still weaken them. This means that investors should keep an eye on these factors to understand how EM currencies might behave in different economic scenarios.