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.
Key quotes
“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.”
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. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD holds gains near 1.0650 amid risk reset
EUR/USD is holding onto its recovery mode near 1.0650 in European trading on Friday. A recovery in risk sentiment is helping the pair, as the safe-haven US Dollar pares gains. Earlier today, reports of an Israeli strike inside Iran spooked markets.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD is rebounding toward 1.2450 in early Europe on Friday, having tested 1.2400 after the UK Retail Sales volumes stagnated again in March, The pair recovers in tandem with risk sentiment, as traders take account of the likely Israel's missile strikes on Iran.
Gold price defends gains below $2,400 as geopolitical risks linger
Gold price is trading below $2,400 in European trading on Friday, holding its retreat from a fresh five-day high of $2,418. Despite the pullback, Gold price remains on track to book the fifth weekly gain in a row, supported by lingering Middle East geopolitical risks.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Geopolitics once again take centre stage, as UK Retail Sales wither
Nearly a week to the day when Iran sent drones and missiles into Israel, Israel has retaliated and sent a missile into Iran. The initial reports caused a large uptick in the oil price.