Will dollars – and euros – flow out from emerging markets this week? Experts weigh in

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on Dec 6, 2023
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  • As Nonfarm Payrolls and GDP figures come in, will we see dollars leaving riskier markets for safer shores?
  • Professor Şebnem Kalemli-Özcan explains the 'dollar comes home' effect.
  • But will it play out in December 2023? Especially with lower interest rates likely on the horizon?

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This week, the market sees many highly anticipated announcements. These include the United States’ Nonfarm Payrolls, several nations’ quarterly GDP growth rate figures (including the Euro zone’s) and the start of December’s interest rate decisions, which have already kicked off with Australia and Canada and will culminate in announcements from the Fed and BoE next week.

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But this may not be all that’s going on in the coming week or two. The significance of these figures – especially for emerging markets – will be interesting, according to American research nonprofit Brookings Institute.

Experts on the ‘dollar coming home’

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In a recent interview on the Brookings Podcast on Economic Activity, Economist and Economics professor Şebnem Kalemli-Özcan explained the term she referred to as ‘the dollar comes home effect’, which is usually synonymous with hawkish times:

Because Fed is hiking, that means higher return to dollar, dollar’s going back to United States, that means capital flow reversals from emerging markets. And this time around, if you go back to 2022, a lot of people were expecting the same phenomena to happen to emerging markets. And this didn’t happen so far, of course. We don’t know what the future holds, but so far as of 2023, this doesn’t happen. And it is interesting because, the Fed did increase a lot in less than two years.”

So, are we still to see this play out – lower risk developed countries seeing greater inflows as emerging markets are left high and dry? Especially with a far more dovish 2024 on the horizon?

Well, investors happen to have plenty of recent data to look at.

Emerging markets: a better story than expected?

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On December 5th, Brazil released its Q3 GDP figures. The country grew by a marginal 0.1%, quarter on quarter (QoQ), rather than contracting as many had feared.

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The same day, the South African rand (ZAR) released unpleasant GDP figures. The nation’s economy contracted marginally by 0.2% QoQ – more than the 0.1% analysts had expected, according to Reuters. However, South African economists have noted that the country’s ongoing electricity woes play a massive role here.

Perhaps the most successful growth story was India’s, posted on November 30th, which showed real GDP to be up 7.6% QoQ in Q3, building off of Q2’s strong 6.2% rise.

Will Europe’s Q3 GDP figures on December 7th and America’s Nonfarm Payrolls on December 8th tell the same story? Or will ebullient messages of capital flowing into those markets prove that dollars, and euros, have indeed flown home? As we wait to see, the world is watching.

See more: IMF’s World Economic Outlook projects soft landing even as global economy is ‘limping along’

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