USD weakness to support EM FX
|- Relative COVID-19 cases have contributed to relative performance of EM FX.
- Slowing growth in new casesshiftsfocus to global drivers such as direction of USD.
- Our base-case is a weakening USD over the coming months as the global and US recovery strengthens, resulting in a cautiously optimistic view on EM FX.
Over the past month, the COVID-19 virus has continued to affect many emerging and frontier markets. The worst hit region appears to be LATAM, headed by Brazil but India, South Africa, and Russia have also struggled to contain the virus. The bad news is the virus is taking its toll on the economies; last week, the IMF significantly downgraded the growth outlook for 2020; especially for India (-6.5pp), Mexico (-3.9pp) and Brazil (-3.8pp). The good news is the growth rate of new cases is coming down in most countries with the exception of India and South Africa (see chart 1 and more through virus tracker on page 3). However, the test capacity in EM is weaker than in developed countries and this adds to less visibility on the situation (page 3).
Differences in the prevalence of COVID-19 have contributed to relative performance of EM FX over the past month (chart 2). LATAM currencies such as BRL, MXN, CLP and ARG have lost most ground to the USD as policy easing and/or worsening of economic fundamentals have been priced in. Meanwhile, in the other end of the spectre we find currencies of countries with best control over the virus, such as KRW, THB, CZK and to some extent PLN and RUB.
As the spread of the virus is starting to slow down and economic recoveries get underway in most countries, we think global factors will resume as key drivers in EM FX and the USD is set to be pivotal. In our base-case of a weakening USD over the coming months as Fed keeps the printing press open and the global and US recovery strengthens further, we are cautiously optimistic on EM FX. A key risk is the rapid spreading of the virus in many southern and western US states, which could derail the nascent US economic recovery and send the USD higher. In such downside risk scenario, EM FX will be under pressure.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.