Pressure on Chinese Renminbi Hits Other Emerging Market Currencies

The Chinese currency has fallen sharply against the dollar in the past two weeks, hit by the economic impact of the country’s Covid lockdowns, the war in Ukraine and the prospect of tighter US monetary policy. But the renminbi has not moved in isolation: analysts warn it is dragging other emerging-market currencies with it, including those outside the Asian manufacturing complex.

With food and energy prices soaring, commodities-exporting emerging market currencies such as Brazil and South Africa are among the few to benefit from the Russian invasion of Ukraine in late February. Many such currencies also benefited earlier this year from Chinese demand for industrial commodities such as copper and iron ore.

In April, however, the combination of China’s slowing economy and the global impact of the war caused emerging market currencies around the world to decline.

Yerlan Syzdykov, global head of emerging markets at Amundi, says the increase in strict lockdowns in China is causing weakness in the economy. The worst-case scenario projected by Amundi analysts is that lockdowns will cut production by 10 percent and steel production by 18 percent.

Amundi was bearish about Chinese growth before the recent lockdowns kicked in. His house believed GDP growth this year would be nearly a full percentage point lower than the IMF’s forecast of 4.4 percent. But even that figure is now under pressure, Syzdykov said.

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“This is negatively impacting commodity prices – those countries, especially in Latin America that have had a positive effect on their terms of trade so far, are going to pull out,” he said. “This will certainly affect their longer-term prospects.”

At the end of April, the Brazilian real was one of the best-performing currencies in the world earlier this year, rising 20 percent against the dollar. A sharp drop since then has made it a more modest 13 percent higher.

Meanwhile, the Peruvian sol and Colombian peso have fallen sharply. The Chilean peso and South African rand have wiped out nearly all of this year’s gains.

Central banks in Brazil and several other emerging markets reacted early to the prospect of rising US interest rates and a stronger dollar by lifting borrowing costs from the first half of last year.

But while it was expected before the war in Ukraine that inflation in emerging economies would peak around the middle of this year, Syzdykov said it will now likely be delayed for at least another three months, potentially putting more lingering pressure on currencies. of those countries. †

Only then could a new recovery follow, suggested Syzdykov. “That would be the time when international investors are going back in, and those flows will help to drive those currencies back,” he said.

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