One Chart Shows Why Emerging Markets Haven’t Cracked (Yet)

So earlier today, in what’s already been a pretty damn popular post, we highlighted a “disaster waiting to happen.”

One of the important points in there was the extent to which a strangely – some would say “eerily” – stable RMB may be the only thing that’s keeping “big trouble in little China” from spilling over into EM more generally.

Specifically, we said the following:

To be sure, some of this has to do with the recent stability of the yuan. But we’re not entirely sure how sustainable that is. This has always been a tightrope walk for China – devalue to support the economy, but don’t devalue too much because if you do, you’ll exacerbate capital flight, which will feed back into more RMB weakness, which will mean spending more FX reserves, and around the doom loop we go.

Well, consider that with the following two charts out Tuesday morning from Deutsche Bank which illustrate that point quite poignantly:

CinaDB1

ChinaDB2

“It will be crucial whether slowing [global growth] translates into more outflows or a shift in Chinese authorities FX policy,” Deutsche writes, adding that “USD/CNH vol has so far remained very well contained (figure 4), but any pick-up would be much more bearish for the EM FX complex.”

Any questions?

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