It’s bad to be a borrower when rates are rising, and countries with current account deficits are sensitive to developed-market rates. The International Monetary Fund’s widely-cited warning today that emerging markets are vulnerable to tightening financial conditions in the US and Europe applies to deficit countries like Brazil, Turkey and Mexico–but maybe not so much in Asia, where most countries run current account surpluses.
We see the difference clearly in the sensitivity of different currencies to changes in the level of the US yield curve. The charts below show the three-month rolling correlation of daily returns to selected currencies against daily changes in the level of US Treasury yield (the 1st Principal Component of the Treasury Curve).
Not surprisingly, there is a high correlation between daily returns to currencies and US rates in the case of deficit currencies like the Brazilian real, Turkish lira and Mexican peso, but there is a very low correlation in the case of China, India, Taiwan and the Philippines.