Emerging-Markets Currencies Stay Strong Despite Dollar’s Rise

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The Brazilian real, the Chilean peso and other commodities are benefiting from higher prices and global trade disruptions

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But currencies including the Brazilian real, the Chilean peso and the South African rand have gained even as the dollar strengthened. This is because investors are moving to currencies that benefit from higher commodity prices and trade dislocations.

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The real – which has appreciated 13% against the dollar to date – has been a favorite among asset managers due to Brazil’s position as a leading exporter of soybeans and coffee.

The Chilean peso has benefited from being one of the largest producers of copper in the world.

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Financial markets have been volatile in May. The dollar has retreated from its highs in recent weeks, and the yield on the benchmark US 10-year Treasury has fallen below 3%. Nevertheless, analysts and traders say that the size and momentum of the recent move remain important.

The dollar’s boom has created volatility in the currency markets and attracted more investors to the asset class. Money managers typically sell emerging market currencies when the dollar rises, but the sharpest commodity rally in modern trading history and various central-bank policies around the world have exacerbated traditional dynamics.

“How can emerging-market currencies grow in the first quarter in a world where you don’t have wars, supply-chain destruction, a strong dollar and a weak euro—those things,” said Nafez Zouk, an analyst. London-based Aviva Investors,

The dollar serves as the world’s reserve currency and is used to trade goods in the global economy. A strong dollar often hurts emerging market economies by weakening their currencies and increasing inflation. This also makes the import of foreign goods expensive.

Emerging market currencies tend to go lower when the dollar suddenly rises higher. This is because investors turn to the US dollar when they are concerned about global growth prospects or seek shelter during periods of market turmoil.

Investors are now focusing on trade balance and local factors to determine whether to buy or sell foreign currencies rather than the direction of the US dollar.

“That’s usually what happens to the dollar,” said James Lord, head of emerging market forex strategy at Morgan Stanley. “But commodity prices have risen in the context of slower growth, creating a divergent relationship between commodities, the dollar, and emerging market currencies.”

Some of the losers in emerging market currencies are exposure to China or rising energy costs. Hedge funds are selling currencies such as the Thai Baht and the South Korean Won. Thailand and South Korea largely depend on others for fuel.

Asset managers have sold off the offshore Chinese renminbi, also known as the offshore Chinese yuan, as a direct bet that China’s economy will slow down in the wake of the COVID-19 lockdown and so-called deglobalisation. The offshore Chinese renminbi is down as much as 7.3% against the dollar since the start of the year. Some analysts argue that COVID-19 has exposed vulnerabilities in supply chains and is forcing US businesses to re-evaluate global trade.

Investors are buying emerging market currencies associated with countries where central banks are raising interest rates to curb price increases. The Central Bank of Brazil this month raised its benchmark lending rate to the highest level in five years, while the National Bank of Poland raised its key rate by three percentage points to 5.25%. This has attracted investors to the Polish zloty and the Brazilian real.

“Emerging market central banks are forced to tighten policy to keep pace with the Fed,” said Stephen Gallo, European head of FX strategy for BMO Capital Markets. “It’s either that, or capital controls are imposed.”

Write to Julia-Ambra Verlaine at [email protected]

Credit: www.Businesshala.com /

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