As they struck a cautious tone, the Fed minutes offered some breathing room for risk assets, with the committee seemingly mindful of the potential increase in US inflation in the second quarter and reluctant to overreact until it is sure that inflation will reach 2% for some time. Emerging market FX remains relatively resilient amid the notable increase in US Treasury yields this year. Not only are EM FX valuations not excessively stretched, many EM currencies are benefiting from increasing commodity prices, but this FX segment should continue to display signs of relative resilience as long as the increase in US Treasury yields is followed by improving global economic prospects. Looking forward, if the Fed is able to walk the fine line between improving economic data and communicating it, the consequent orderly increase in treasury yields does not derail the constructive outlook for the coming months for high yielding cyclical EM FX.
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