Emerging market central banks are grappling with the complexities introduced by potential US tariffs, which could lead to inflationary pressures through currency devaluation. Mexico, with one of the most restrictive policy rates among major economies, is in the process of easing. However, the anticipated rate cuts may be tempered by inflationary pressures from tariffs and a weakening currency, potentially leading to stable or even higher swap rates. Banxico's upcoming meeting is expected to provide more clarity on how it plans to navigate these challenges.
In Brazil, the central bank is taking a hawkish stance, as revealed in the minutes from its recent meeting. The bank is concerned about the inflationary impact of US trade policy chaos, which could lead to a depreciated Brazilian real and increased inflationary pressure. This has resulted in rising swap rates as the central bank hikes rates to counter these risks. The uncertainty surrounding US trade policy and its implications for global growth and inflation adds another layer of complexity for emerging markets.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), which focuses on local currency bonds from emerging markets, is currently trading at $23.61 as of 14:21 on February 4, reflecting the broader market's response to these geopolitical and economic uncertainties.