Published: May 14th, 2020
A majority of FX market strategists and analysts surveyed in early May told researchers they expect emerging market currencies like the rupee and rand – economies heavily reliant on commodity exports to China – could weaken or remain stagnant against the greenback over the next 3-4 months.
Trade friction and the threat of tariff action or other sanctions against China by the Trump administration mean safe havens will likely remain popular for the foreseeable future. With coronavirus lockdown measures starting to ease alongside aggressive policy easing by the Fed, many traders were warming to riskier bets that might return higher yields.
That cautious optimism has been blunted by an increasingly bellicose stance from the White House. The US president and secretary of state Mike Pompeo have been vocal in their criticism of China’s initial response to the outbreak, even suggesting last week that the virus may have been engineered in a biotech lab located in China’s Wuhan province, where the outbreak began.
That’s shifted investor gaze back to safe havens and underpinned the dollar, despite an extended 30 per cent rally for Wall Street over the previous two months after it crashed by more than a third when the epidemic turned into a full-blown global pandemic.
Analysts at Rabobank in Hong Kong told Reuters they thought the war of words between China and the US would bring the rally in stock trading to a halt. Many other poll respondents said they were predicting higher forex volatility in the months ahead.
To calm markets in the wake of the Trump administrations heated rhetoric, China announced a long list of US imports this week that would now be eligible for tariff waivers amid rising tensions.
The list covered nearly 80 products, including medical products, chemicals, and some raw materials. Chinese importers have six months to apply for the waivers.
The announcement arrived as the war of words between the two countries reached its peak. The white house threatened to shred a phase one deal on tariffs signed in January if China doesn’t rapidly increase imports of US goods – a ‘goodwill gesture’ the Trump administration believes China owes the US because of its ‘responsibility’ for the pandemic.
With supply chains on both sides severely disrupted by COVID-19, bilateral trade between China and the US declined sharply between January and April.
According to an MSCI index, emerging market currencies are down six per cent cumulatively since the start of the year. After dropping to three-year lows at the end of March – a three and a half per cent fall and one of the worst months on record – by late April they had begun to stabilise.
Hopes for further rises, however, will now be tempered by a resumption of hostilities in the simmering China-US trade war.
Central Bankers in Beijing are expected to keep a tight rein on the yuan, poll respondents said. After scraping a one-month low at mid-week, forecasts show the world’s most actively-traded emerging market currency could hit 7.04 per dollar in three months, improving its position to 7.01 in six months.
Analysts think yuan will go on to appreciate further by ca. two per cent, reaching 6.94 per dollar in 12-months’ time.
Analysts at some of the major investment banks think that level of optimism could be premature.
The Indian rupee has been battered in recent months and isn’t expected to recover against the dollar this year. Forecasts suggest a gain of about two per cent in the next three months from the 75.87 per dollar level it reached this week.
The South African rand, meanwhile, has been highly volatile since January. Supported by higher interest rates, it could achieve modest gains versus the dollar and potential returns of close to ten per cent, closing in on 16.79 per dollar from the ca. 18.49 see this week.
Analysts at Absa Capital in Johannesburg noted that investors will use lower-yielding emerging market currencies as a hedge in troubled times, but then when the outlook improves, a more volatile option like the rand can offer a step back into riskier trades.
That volatility is only expected to subside if there are clear signs that the COVID-19 pandemic is improving, meaning economies can start to return from lockdown and if the US-China trade conflict resists flare-up.
Risk sentiment had been lifting in countries perceived to be doing a better job of keeping the virus in check. New Zealand announced there had been no new cases of infection in the country for two days in a row this week. Finland, Germany, and the US state of New York all announced they were planning to ease lockdown restrictions.
Several central banks in emerging markets like Brazil, India, and South Africa have also opened the taps on monetary policies designed to stimulate liquidity in their respective domestic markets. The USA’s multi-trillion dollar stimulus interventions and swap lines, however, dwarf anything being done in emerging markets.
In the developed world, Coronavirus infections seem to have largely peaked or slowed; it's not clear yet if emerging markets are reaching the same transition point. Without the same extensive and fully-developed healthcare systems and research infrastructures, some emerging markets may be weeks or even months away from being able to say they have the pandemic under control.
Indigenous tribes in Brazil petitioned the World Health Organization this week to set up an emergency fund to help protect their communities, which have seen higher rates of infection and death from the pandemic.
It’s worth noting that doctors from medical charity Médecins Sans Frontieres (Doctors Without Borders) – who usually send doctors to help in areas of extreme distress like war zones – sent a team to the US state of New Mexico this week to help Native American communities there battle the coronavirus.