Chinese renminbi pressure hits other emerging market currencies

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

With food and energy prices soaring, currencies in commodity-exporting emerging markets like Brazil and South Africa are among the few to have benefited from the Russian invasion of Ukraine end of February. Many of these currencies also benefited from Chinese demand for industrial goods, such as copper and iron ore, earlier this year.

In April, however, the combination of a slowing Chinese economy and the global fallout from the war sent emerging market currencies down around the world.

Yerlan Syzdykov, global head of emerging markets at Amundi, says the proliferation of strict lockdowns in China is causing weakness across the economy. The worst-case scenario projected by Amundi analysts is that the shutdowns will lead to a 10% reduction in manufacturing and an 18% drop in steel production.

Amundi was bearish on Chinese growth before the recent lockdowns began. Its internal view was that GDP growth this year would be nearly one percentage point below the IMF forecast of 4.4%. But even that figure is now under pressure, Syzdykov said.

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“It’s having a negative effect on commodity prices – those countries, especially in Latin America, that have had a positive effect on their terms of trade so far, they’re going backwards,” he said. . “It 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 at the start of the year, with a gain of 20% against the dollar. A sharp decline since then left it a more modest 13% higher.

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

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

But whereas before the war in Ukraine inflation in developing economies was expected to peak around the middle of this year, Syzdykov said, that should now be delayed for at least another three months, which could exert more sustained pressure on the currencies of these countries. .

Only after this point could another recovery ensue, Syzdykov suggested. “That would be the time when international investors would start to come back, and these flows will help propel these currencies again,” he said.

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