Emerging market currencies like the yuan, rouble, rand and rupiah are shaking off their United States dollar doldrums, snapping out of a long losing streak in the wake of the Federal Reserve’s current dovish stance and dollar weakness.
As the final trading month of Q1 commences, the picture for emerging market (EM) currencies versus the U.S. dollar is massively different to 2018 when the Federal Reserve was determinedly hawkish and emerging market central banks scurried to hike interest rates to preserve what foreign direct investment (FDI) and currency strength they could. Most EM currencies are holding ground against the dollar and stand a fighting chance now that the interest rate landscape in the U.S. is more forgiving on developing economies and their ability to attract buying interest to domestic asset classes.
Starting with the rupiah, the Indonesian currency’s dramatic fall against the U.S. dollar seen between July and November 2018 charted like the Himalayas as its value plummeted, forcing Bank Indonesia to aggressively hike its key rates to six percent. At its peak, the U.S. dollar climbed to a high of 15,265 against the IDR. In recent months the volatility has settled somewhat as the rupiah manages to hold a steadier course versus the dollar and as Indonesia seeks to attract buying interest from yield-seeking investors. FDI in Indonesia fell to $27.8 billion in 2018, compared to $30.5 billion in 2017, meaning the country needs to regain traction this year to recover from the dollar’s bull run.
Moving to China’s national currency, the yuan depreciated steeply against the dollar in 2018 but seems to be recovering some ground this year. Around the same time as the trade disputes between the US and China flared up in the summer of 2018, the U.S. dollar rocketed up against the yuan, which is still feeling the afterburn in the first quarter. Most emerging currencies are fighting back against the dollar, including the yuan, which is in a skirmish to push its value back to pre-trade war dispute levels.
Over the course of the first quarter, the Russian rouble stabilised against the dolar after considerable volatility during the second half of 2018. Several bearish factors affect the rouble’s short-term outlook, including U.S.-Russia relations, economic sanctions and the level of demand for oil. On the bullish side for the currency is the 7.75 percent interest rate maintained by the Bank of Russia coupled with strong GDP growth, last seen at the level of 2.3 percent for the full year 2018.
Finally, the South African rand is giving the dollar a fight for its money after it reached high peaks in 2018. The Federal Reserve’s patience is good news for the rand, which is holding steady against the USD at the time of writing. But the road to recovery for the rand in the longer term would need to be supported by economic recovery in South Africa, which is not expected until 2021, according to comments from government officials.
Looking ahead to the second quarter, I expect emerging currencies to keep gaining lost ground against the U.S. dollar, barring any unexpected developments from the Federal Reserve’s monetary policy. Nonetheless, it must be kept in mind that EM currencies face pressure from political risks and growth fears, possibly reining in bullish momentum for the short-to-medium term.
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