Emerging market bets split as global rate paths diverge

A growing divergence in interest-rate outlooks is forcing emerging-market investors to reshuffle bets.

Within the past week, Indonesia's central bank delivered an off-cycle rate hike to reverse a market selloff and support its currency, while policymakers in Hungary and Poland are considering lowering borrowing costs after inflation fell short of estimates. Traders - who are also bracing for rate decisions in the US and Japan - expect Brazil to cut and Chile to keep key rates unchanged in the coming days.

"Divergence is the theme in the market now, given each country's different inflation dynamics and central bank credibility," said Ning Sun, senior EM strategist at State Street in Boston. "Core rates are rising in the US, Europe and Japan. But in EM, not everything is moving up with the core rates these days."


Sun favors currencies and rates with what she calls "good carry" - high yields backed by credible policy frameworks and stable fundamentals - including Brazil, Colombia, Hungary and South Africa. She's shorting what she deems as "bad carry" currencies, such as the Indian rupee and Indonesian rupiah, while steering clear of lower-yielding names due to uncertainty over the Federal Reserve's path.

The widening discrepancies in monetary policy paths come amid increased volatility in global markets, roiled by constant changes in the outlook for the Middle East conflict and its impact in energy prices.