China’s 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 that it is dragging other emerging-market currencies with it, including those outside the Asian manufacturing complex.
With food and energy prices soaring, the currencies of commodity-exporting emerging markets such as Brazil and South Africa are among the few that have gained any advantage from Russia’s invasion of Ukraine in late February. Many of these currencies also benefited from Chinese demand for industrial commodities, such as copper and iron ore, earlier this year.
In April, however, the combination of China’s slowing economy and the global fallout from the war sent emerging market currencies around the world down.
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 analysts at Amundi is that the lockdowns will lead to a 10 percent reduction in manufacturing and an 18 percent drop in steel output.
Amundi was pessimistic about Chinese growth before the recent lockdowns began. His inside view was that GDP growth this year would come in almost a percentage point below the IMF forecast of 4.4 percent. But even that figure is now under pressure, Syzdykov said.
“This is having a negative effect on commodity prices: those countries, especially in Latin America, that have had a positive effect so far on their terms of trade, are going backwards,” he said. “This will definitely affect their long-term prospects.”
At the end of April, the Brazilian real was one of the best performing currencies in the world earlier this year, gaining 20 percent against the dollar. A sharp pullback since then has left it a modest 13 percent higher.
Meanwhile, the Peruvian sol and Colombian pesos have fallen sharply. The Chilean peso and the South African rand have erased almost 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 raising borrowing costs since the first half of last year.
But while the expectation before the Ukraine war was that inflation in developing economies would peak in the middle of this year, Syzdykov said, this is now likely to be delayed by at least another three months, which could exert more sustained pressure on the currencies of those countries. .
Only after that point could a new recovery occur, Syzdykov suggested. “That would be the time when international investors start to come back, and those flows will help boost those currencies again,” he said.