The three conditions needed for EM currencies to do even better are a sustained dial back of US-China tensions, a weak USD backdrop and EM growth outperformance, in the opinion of economists at HSBC.
“US-China tensions: Our baseline view has been that the 'Phase 1' agreement will be maintained, which means the RMB's depreciation pressures should be contained. However, we are also cognisant of not taking this line of thought too far, as there could be more uncertainty on US-China trade and other sources of friction between both sides ahead of the US election. As such, this first condition is not seen as being met for the EM FX outlook to improve, in our view.”
“USD policy: Some US officials recently commented ‘The dollar is very strong...and dollars – strong dollars are overall very good.’ (Bloomberg, 19 April 2020) and ‘It's a great time to have a strong dollar...Everybody wants to be in the dollar because we kept it strong.’ (Reuters, 14 May 2020). This marked a sharp turn in thinking compared to the language used in previous years and stands at odds to the USD's overvaluation. We think that it is not apparent that a weak USD policy exists implicitly or explicitly and hence the second condition that stress tests our EM FX is unfulfilled.”
“EM growth: We have a ‘marginally glass half full’ view on EM growth. The worst has probably passed, but it is not clear when this will return to the pre-pandemic ‘baseline’ and if they can do so ahead of developed market (DM) economies or not. To us, this means that there is currently no clear economic impetus for EM FX to either rebound or depreciate significantly again in the near term.”
“It is not conclusive that all conditions are being met for a further broad-based EM FX rally, and we hold a neutral view on Asian currencies in the near-term.”
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