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MACROECONOMICS


Indications suggest financial market reform will be emphasized. Look for China to protect its flanks, and this can be done only by changing its practices. China may be fortunate that there is not a multilateralist in the White House who wants to lead a coalition against it. It has two years before that could change.


Emerging markets may come back into favor


this year. Two


big headwinds for most emerging markets - rising US rates and high oil prices - will lessen. Chinese stimulus and ongoing efforts to find alternative inputs and markets away from the US will Asia-Pacific economies. Money chasing returns had left


emerging markets and


liked the developed equity markets until the end of Q3 18. Te MSCI Emerging Markets equity index outperformed the MSCI World Index of the developed markets by about nine percentage points so far in Q4 18. We expect this trend to continue next year.


Te JP Morgan Emerging Market Currency Index fell by about 12% in 2018. It appears to be carving out a low, but this does not preclude lows. The sharp depreciation in several of the large emerging market countries


will likely


improve external accounts but the second round effects, including the compression of domestic demand, and inflation may quickly eat away


at the improved competitiveness. Regionally, Latam faces a headwind from falling commodity prices, and Eastern and Central Europe are tied to the euro. East Asia benefits the most from the drop in oil prices and China's stimulus. Mexico is always interesting. The peso is off 1.4% year-to- date, third best among emerging markets, behind the Hong Kong dollar and the Tai baht (both off about 0.25%). Our suspicion that AMLO is Lula's tradition rather than Chavez has been bolstered by the early appointments and policy signals.


The Australian dollar was the weakest of the major currencies in 2018. Its nearly 10% depreciation against the US dollar, 4.6% against the New Zealand dollar, and 4.2% against


the Chinese


yuan returned it to near fair value (+3.5% above the OECD's PPP calculation).


Given the high


household indebtedness and falling house prices, we look for easing conditions to come through rates and/or currency. The central


bank is reluctant to cut rates and continues to suggest the next move, so time off, will be a hike. Australia will hold elections for half the Senate and the entire House in 2019.


Joint elections


likely it will be held in May after the 2019 budget is presented in early April.


Te Canadian dollar was near fair value according to the OECD's measure of PPP at the end of 2017 but moved away from it with the 7.6% depreciation against the US dollar.


The Canadian dollar is


finishing 2018 at 18-month lows as the market prices out additional rate hikes. The dramatic drop in oil prices has ripple effects through the economy, which is highly levered. Trudeau's foreign policy first with Saudi Arabia and then with China may be faultless, but it has won it few accolades from the US. Canada holds national elections in late October.


Marc Chandler


Global Head of Currency Strategy Brown Brothers Harriman


FX TRADER MAGAZINE January - March 2019 17


FX


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