A stronger US dollar is proving to be an early test for emerging-market currencies on the eve of Joe Biden’s inauguration.
The greenback gained over the last two weeks, buoyed by the president-elect’s proposal for a $1.9 trillion stimulus package. Most developing-nation currencies have slumped in that span, and history suggests further pain may be in store.
Emerging-market currencies climbed against the dollar over the vaccine rollout.
MSCI Inc.’s gauge of emerging-market currencies ended 2020 with its biggest quarterly advance in a decade as optimism over the distribution of Covid-19 vaccines bolstered risk appetite. Now, to a backdrop of rising cases, renewed lockdowns and vaccine concerns, it threatens to reverse those gains.
“If vaccines prove less effective than we expect and [the] global economy stumbles, the ‘safe haven’ dollar would likely appreciate,” Goldman Sachs Group Inc. strategists including Zach Pandl wrote in a report.
Still, the strategists “expect broad dollar weakness” this year as exposures to risk assets and upside in commodity prices outweigh the potential drag from higher US rates.
One currency of interest to investors is the Turkish lira, after President Recep Tayyip Erdogan repeated on Friday his long-held belief that high interest rates fuel inflation, rekindling doubts over the direction of Turkey’s monetary policy. On Thursday, the central bank is expected to keep the nation’s one-week repo rate at 17 percent.
“The lira has rallied and reserves are stabilizing, providing no reason to raise rates further,” according to Bloomberg Economics. “Still, inflation accelerated in December, limiting the scope for rate cuts.”
Policy makers in Malaysia, South Africa and Brazil will also decide on their borrowing costs this week.
Meantime, Biden’s return to the White House on Wednesday will carry particular significance for traders who follow relations between the world’s two largest economies. The Trump administration has announced it would sanction six officials from China and Hong Kong in a parting shot to Beijing.
Central banks decide
Bank Negara Malaysia is expected to keep its benchmark rate on hold Wednesday, according to a median estimate of economists surveyed by Bloomberg.
Bloomberg Economics argues that the central bank can afford to stand pat after 125 basis points of easing last year. Oil prices are also recovering, and Malaysia’s key trading partner, China, remains on the mend, it said.
Still, it looks like a close decision, with 12 out of the 24 economists in the Bloomberg survey expecting a 25-basis-point cut after Malaysia was placed under renewed lockdown, and in part because of Malaysia’s persistently low inflation readings.
Malaysia’s December year-over-year CPI is expected to remain deeply negative on Friday.
The rate decision comes after Malaysia’s king declared a nationwide state of emergency for the first time in more than half a century, suspending parliament in a move that allows embattled Prime Minister Muhyiddin Yassin to avoid facing an election until the pandemic is over.
Bank Indonesia is expected to hold policy rates unchanged on Thursday.
The central bank didn’t signal that more cuts were imminent at its previous meeting in December, and may be concerned about the risk of higher US yields putting the rupiah under pressure.
One economist in a Bloomberg survey expects a 25 basis-point cut, perhaps because inflation has remained below target for seven months straight.
China’s one-year loan prime rate—the reference rate for bank loans to companies—will likely remain at 3.85 percent in January, according to Bloomberg Economics.
Brazil’s central bank is expected to hold the key rate at an all-time low on Wednesday, while traders look for signs of more hawkish language after policy makers warned that inflation pressures could persist into the new year.
Key Chinese data
China’s economic data was probably enough to restore China’s outperformance narrative. Fourth-quarter GDP and industrial production nummbers both beat expectations in year-over-year terms. However, retail sales and fixed asset investment numbers both fell short.
December currency settlement data from SAFE are due on Friday. This was previously scheduled for last week. It will be interesting to see if the hitherto low exporter-conversion rates have started to increase, as one would expect given the yuan’s steady trend of appreciation in the second half of 2020.
Ongoing Chinese official resistance to appreciation will also be monitored by traders after higher than expected yuan fixes and reports of state banks buying dollars.
The yuan edged lower last week and the offshore rate is a little weaker than onshore, suggesting that China has somewhat tamed appreciation expectations in the short-term. Bloomberg News
Image credits: Bloomberg photo