It’s been a blistering start to the year for emerging markets. After a dismal 2018, the asset class is suddenly back in vogue enjoying a winter renaissance among investors. The anxiety last year caused by global liquidity withdrawal, US exceptionalism and capital outflows now seems like a distant memory.

Undoubtedly the exogenous backdrop has turned more favourable for EM. As growth expectations slow, both domestically and abroad, the US Federal Reserve has been quick to change its tune despite a tight labour market and rising wage pressures. In acknowledging the likelihood of stable interest rates for the foreseeable future, while also hinting at a deceleration of its balance sheet unwind, the Fed has switched on the green light for risk appetite.

Much has been made of recessionary risks in the US given the typical late cycle dynamics of elevated corporate debt leverage and a flat yield curve. For emerging markets, the key now is whether the Fed can guide the economic flight path towards a sweet spot runway landing of around trend growth — not too hot, not too cold. The drawdown in US growth expectations, and the subsequent repricing lower of the Fed funds strip, has weighed on the US dollar against EM currencies, which continue to recover from their 2018 lows having arguably already experienced their own “Waterloo moment” last September. The greenback, already laden with twin deficits while trading at all-time trade weighted highs, looks increasingly vulnerable.