EM View: Casualties of War – October 2018

The US-China trade war has morphed into a full-on slugfest. Download the latest EM View today.

Trading blows: The phony war is over as the US-China row worsens. Source: Mike_Sheridan/gettyimages

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Following another sell-off, emerging market currencies have stabilised over the past few weeks, but with the trade war escalating, EM FX is not out of the woods yet. The fear now is that the US-China sparring has morphed into the kind of slugfest from which either party could find it difficult to retreat.

The trade war between the world’s two largest economies could disrupt the global value chain and spell a slowdown in world trade. Elevated uncertainty from the trade war adds to the already dangerous cocktail of balance sheet reductions from the Fed, domestic political clouds and other US sanctions. The result is a murky outlook for EM FX.

A fresh round of EM sell-offs, induced by the trade war, would likely hit the Asian currencies the hardest, especially the KRW, TWD and SGD, as they are small and open economies with high reliance on Chinese demand.

CNY: Breaking seven
As a new tactic, the PBoC is keeping its currency intervention gunpowder dry for
the battles ahead; this will likely buoy the USD/CNY, even to the psychologically
important level of 7.0.

RUB: Not ready to surrender
The pressure on the RUB has substantially eased but sanctions risks still can’t be
dismissed all together. Optimism is fragile and can quickly be shattered by
hostile rhetoric. But strong fundamentals ensure that new pressure episodes are
likely to be short-lived.

PLN: Trade war showing its face in exports
The zloty’s primary driver remains the overall market sentiment. Longer out,
politics and uncertainty about global trade are risk factors pointing to a
moderate slowdown in growth.

In focus – BRL: Get ready for the “Tropical Trump”
The fate of the BRL is dependent on the outcome of the presidential election on
Sunday, as Brazil needs reforms to stabilise public finances. However, market
favourite Bolsonaro is only ‘a lesser evil’, making the BRL vulnerable in the long
run irrespective of the outcome.


FX hedging considerations, the EM Traffic Light and financial forecasts are also
covered in this publication.

Related research:

Emerging Markets View: House of Cards – September 2018
Emerging Markets View: Thunderstruck – August 2018

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