Emerging market currencies energised - Natixis

Analysts at Natixis explain that clearly, the environment was favourable to emerging currencies in the first quarter of 2017, as both the US dollar and US long interest rates were on the back foot, while commodity prices (notably for metals) were on the up, Chinese growth being firm, economic fundamentals improving in many emerging countries and foreign capital inflows picking up.

Key Quotes

“In the end, the announcement of protectionist measures by Trump failed to have much of an impact. The renegotiation of the North American Free Trade Agreement (NAFTA) may well prove perfunctory, which is why the Mexican peso rebounded sharply by almost 11%. Generally speaking, most of the emerging currencies that were penalised by the prospect of a sharp rise in US long interest rates and the US dollar were the ones that appreciated in the first quarter, cases in point being the South Korean won and the South African rand, despite political risk rearing their head at the end of the quarter, but also the Polish zloty.”

“The appreciation of other currencies such as the Indian rupee, Brazilian real and Russian ruble was spurred rather more by the improvement in their economic fundamentals. Finally, the Turkish lira plummeted because of the political risks in the run-up to the April referendum on the reform of the constitution and the adoption of a presidential regime. Over the next few months, emerging currencies will slightly consolidate gains in the first quarter due to a stronger dollar, higher US long-term rates and the risk of price correction for certain commodities, particularly metals.”

“In Asia, the Chinese yuan stabilised against the US dollar around 6.88, helped by the US dollar’s bout of weakness. The tougher capital controls and higher short term rates introduced by the authorities stemmed capital outflows, and hence the need for the PBOC to dig into its foreign currency reserves, which stabilised. The firmness of the Chinese economic growth was also reassuring, especially since the authorities have pledged to curb excess production capacity in a number of sectors (steel, construction, etc.). In coming months, we see the USD/CNH heading higher, chiefly in reaction to a slightly stronger US dollar, towards 7.10 at the end of the year (no longer 7.25) as Trump could be irked if ever there is a seemingly excessive depreciation of the yuan.”