Variation in the performance of currencies has been a striking trend in emerging markets since the start of the coronavirus crisis. Made particularly noticeable by the extraordinary demand for US dollars when investors liquidated positions across many asset classes in March, it has persisted since then.
Analysis by Mosaic Smart Data shows that overall emerging market currency liquidity during the period of May 20 to June 10 was at 66% of its pre-Covid level.
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Phoenix Kalen, |
Within specific pairs, USD/MXN average spreads were about four times higher and liquidity had fallen by around half, while USD/ZAR liquidity saw spreads double and liquidity also halve.
In contrast, USD/EUR volumes were 11% above the pre-Covid average.
Idiosyncratic risk, disparities in dollar liquidity access and external funding needs, the extent of and capacity for currency intervention, and the effectiveness of countries’ strategies for tackling Covid-19 are the main reasons why the Brazilian real and the South African rand have fallen much further than, for example, the Philippine peso.
The MSCI Emerging Market Currency Index for the period January to March shows a 25% reduction in the value of the real against the dollar, while the rand fell by 26% between the end of 2019 and the end of March this year, whereas the Philippine peso was down by less than 1% over the same period.
The real has been hammered by a combination of political turmoil, sharp economic contraction and unclear outlook for recovery, as well as a confused response to containing the pandemic, Phoenix Kalen, emerging markets strategist at Societe Generale, tells Euromoney.
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The rand, meanwhile, suffered from the loss of South Africa’s last investment grade credit rating, USD liquidity stress and escalating fiscal woes.