While countries in Latin America started their hiking rates earlier in 2021 to help combat inflation, the US Federal Reserve only started its current hiking cycle in March, ratcheted swiftly in the past few months amidst the continuing threat of high inflation, made worse by the Russia-Ukraine conflict.
Since then, it has become almost fashionable for central banks around the world to turn hawkish and play catch up on monetary policy tightening. Amid the rate hikes, the Federal Reserve has also started allowing its maturing bonds to roll off, rather than reinvesting the proceeds in what is termed as Quantitative Tightening (QT).
While the start of QT had been well flagged and expected to be a gradual multi-year process, the exact market implication of the unwinding adds uncertainty in what is already a highly uncertain period for financial markets. While the reasons leading to pullback of funds into developed markets are manifold, this has historically come at the expense of the rest of the world. A weakening local currency results in higher debt servicing cost of foreign currency debt, typically denominated in the US dollar.