EM currencies to strengthen if US election result is not contested – HSBC

Emerging markets currencies could benefit in the short-term if the US election result is not contested but growth and macro policy are key for capital inflows and for the longer-term fortunes of emerging markets FX. CNY strength is set to continue, while the INR may see upside from strong capital inflows, economists at HSBC report.

Key quotes

“In the short-term, risk appetite could play a part: if the election is not contested and the outcome is known sooner rather than later, then EM FX should benefit, otherwise the USD may strengthen amid risk aversion. But, this type of knee-jerk reaction should be short-lived. In the long-term, we are mindful that a larger US fiscal stimulus package could lead to a stronger cyclical recovery that may see the USD performing better than some may think.”

“The pertinent issues heading into 2021 will probably relate to the growth and macro policy settings that will shape whether capital inflows can return. EM growth indicators have been improving lately but the pace from hereon could slow. China’s import growth is currently the strongest (or contracting the least) among EM and G3 (United States, Eurozone and Japan) economies. This is benefiting some Asian economies and could increasingly be felt by others.”

“In terms of currencies, those in Asia have been relatively resilient over the past month and this should not change before and after the US election. Their relatively stronger fundamentals should keep them supported.”

“The CNY continues to be resilient, even though China’s 3Q GDP grew by 4.9% YoY, which was slower than expected. We think that the CNY’s trend appreciation is not yet over, but there could be a brief period of consolidation in the near-term. We also think the INR is well placed to strengthen further supported by strong capital inflows, despite the slow growth environment.”