NAB’s FX team has a note out today on why an emerging market sell off matters for the Australian dollar.
A Rise in US and global yields means EM bonds are being sold like crazy, which matters for Australia’s economy as it has become increasingly connected to others in the Asia-Pacific region – countries which make up a big chunk of the world’s EMs.
Data from fund tracker EPFR, cited by NAB, shows $38.03 billion was poured into EM bonds in 2012.
So far in 2013 bond funds have only seen net inflows of $3.35 billion, with up to $6 billion in outflows, during June. NAB says there has been consistent selling since late May.
That’s because the yields on these bonds have risen. Cheap funding is also dwindling, and according to NAB investors are questioning the viability of emerging markets that depend on cheap credit.
So, from NAB’s note, here’s why it matters to the long-term outlook for the AUD:
The longer-term, more fundamental, driver of a weaker AUD on the back of regional weakness, are concerns regarding the outlook for Australian growth. If the region is experiencing an economic slowdown associated with currency weakness and higher interest rates, then this will follow through to demand for Australian exports.
NAB predicts the AUD will be at 86 US cents by the end of the year, and at 80 cents at the end of 2014.