A stronger U.S. 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’sproposal 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.
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, the backdrop of rising cases, renewed lockdowns andvaccine concerns threatens to reverse those flows.
“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 can outweigh the potential drag from higher U.S. rates.
One currency of interest to investors is the Turkish lira, which has climbed since hitting a record low in November. On Thursday, the central bank is expected to keep the nation’s one-week repo rate at 17%.
“The lira has rallied and reserves are stabilizing, providing no reason to raise rates further,” according toBloomberg 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. On Friday, the Trump administration announced it wouldsanction six officials from China and Hong Kong in a parting shot to Beijing.
Central Banks Decide
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Turkey’s central bank will probably leave its benchmark rate unchanged, according to the median estimate of 21 economists surveyed by Bloomberg
- Two economists predict an increase of 50 basis points, while two forecast a hike by a percentage point
- The Monetary Policy Committee led by Governor Naci Agbal boosted the one-week repo rate to 17% from 15% last month, bolstering credibility with investors after he pledged to tighten policy when needed to keep prices in check
South Africa’s central bank will probably leave its policy rate on hold at 3.5% on Thursday, according to 15 out of 16 economists in a Bloomberg survey
- One predicted a reduction by 25 basis points
- The second wave of the coronavirus pandemic, renewed lockdown restrictions and the return of power cuts will likely stall a recovery in an economy that contracted 8% in 2020, according to central bank forecasts. Even so, the central bank signaled at its previous policy meeting that it’s reluctant to lower borrowing costs further after cutting the repurchase rate five times last year by a total of three percentage points
- 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, some economists in the Bloomberg survey expect a 25-basis-point cut, 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.
- 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 U.S. 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
- READ Reflation Flashes Red for Indonesia, Malaysia Debt: SEAsia Rates
Key Chinese Data
- A slew of economic data from China due Monday will be scrutinized given its importance for the global recovery and the Chinese outperformance narrative. The country reports fourth-quarter GDP and industrial production, retail sales and fixed assets investment data
- Optimism over China’s recovery path might be fractionally dented after the poor
credit growth numbers last week and disappointing PMIs for
December
- 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 second half 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
More Data
- Taiwanese export orders for December are expected to show a further 27% year-over-year increase on Wednesday
- The Taiwan dollar remained little changed last week. The authorities are stepping up their efforts to use moral persuasion to prevent currency appreciation, Reuters reported last week
- These figures will likely highlight continued resilience in external demand at the start of 2021
- The Korean won was the worst-performing currency in emerging Asia last week as higher U.S. yields caused a pull-back in Asia’s strongest currency in second half 2020
- That said, a Bloomberg study suggests that the won should be relatively impervious unless the increase in U.S. yields picks up
On Tuesday, Russia’s central bank may publish preliminary 4Q data on the current-account balance, while the federal statistics service releases its consumer confidence index for the same quarter
- The Finance Ministry may report its December budget balance data on Wednesday or Thursday
Inflation in Poland probably slowed in December to 3.7% from 4.3%, a report may show Monday, according to the median estimate in a Bloomberg survey
- That would give the central bank room to reduce borrowing costs as it tries to weaken the zloty
- Inflation for the first half of January, meantime, will probably be relatively stable, according to Bloomberg Economics
— With assistance by Robert Brand
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