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Economic, political factors hamper EM currencies’ rebound

Emerging market currencies look set to continue their bumpy ride over the coming months as the potential for a second wave of coronavirus outbreaks weighs on Asian currency sentiment.

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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.

Phoenix-Kalen 160x186

Phoenix Kalen,
Societe Generale

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.

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