Smoke and mirrors: Beijing residents struggling through the smog might also be worried about the uncertain direction of USD/CNY as the trade war deepens. Source: gettyimages
It has been a difficult year for emerging markets in 2018, as several currencies suffered significant losses on the back of a rising USD, tighter global liquidity conditions and geopolitical uncertainty.
Looking into 2019, the question is whether these factors will continue to weigh on EM FX. To a large extent, we tend to think so. However, new risk factors could also arise, paving the way for an extension of the current high volatility regime.
Thus, according to our EM Traffic Light, fundamental risks in the EM economies are still on the rise, with one important factor being pass-through of this year’s general FX weakness to higher inflation, which in turn should begin to hurt the real economy. In sum, we therefore remain cautious on EM going into 2019, and expect many of the currencies to continue trading close to current historical lows.
Here’s a taste of what’s ahead:
CNY: Targeting stability, not a specific level
The People’s Bank of China is concerned about the rising volatility of the USD/CNY. We think the main aim of its currency intervention is to maintain stability and prevent outflows, not to achieve a specific level.
RUB: Better the devil you know
We find that the RUB is still too weak, even though oil prices are 20% lower than they were a month ago. Our view is that uncertainty over sanctions is keeping the currency undervalued and vulnerable to tough rhetoric from the US.
PLN: Volatility is coming
Despite a lot of turmoil in emerging markets this year, the Polish zloty has been trading within relatively narrow ranges. However, we note that there are signs that 2019 could lead to a rebound in volatility. We give you three reasons why.
In focus – INR: Not out of the woods
India’s external vulnerability and a looming banking crisis in the country leave it prone to another sell-off. The current INR relief may only be temporary.
The information provided within this website is intended for background information only. The views and other information provided herein are the current views of Nordea Bank Abp as of the date of publication and are subject to change without notice. The information provided within this website is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.
The information provided within this website is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided within this website has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.
Nordea Bank Abp is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.
The information provided within this website may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Bank Abp.