Emerging-market currencies diverge on expectations of Biden win


Rising expectations for Joe Biden winning the US election are shaking up emerging-market currencies, with exchange rates moving to anticipate a softer line on Beijing and a tougher one on Moscow and Ankara.

As the polls have shifted further in favour of the Democratic challenger over the past month and a half, emerging-world currencies joined a global rally in riskier assets — reflecting a growing expectation that a sweeping victory for Mr Biden’s party would clear the way for a second major stimulus package for the world’s biggest economy. A broad MSCI index of EM currencies has risen about 2.4 per cent since the start of September.

A Biden presidency would “likely be seen as a more favourable outcome for emerging markets currencies as a whole, given a less confrontational approach on tariffs,” said Meera Chandan, a currency strategist at JPMorgan Chase.

Line chart showing Emerging market currency rebound picks up pace

But below the surface, performance is mixed. The clear winners include China, whose renminbi has already gained more than 2 per cent since the beginning of September as investors start to position for reduced tensions over trade. The prospect of a less confrontational stance has also boosted the Mexican peso and the South Korean won, both up more than 4 per cent over the same period.

But there are a few notable exceptions to the rally, including the Turkish lira and the Russian rouble. While this is partly down to local factors, it is also a sign that investors believe a victory for Mr Biden would broadly favour countries that demonstrate greater adherence to international norms, analysts say.

Nafez Zouk, a strategist at Oxford Economics, said the underperformance reflects expectations that Mr Biden would take a tougher approach on Moscow and Ankara than Donald Trump’s administration.

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“It fits with the idea that Biden will be more of a rules-based president, while Trump has tried to tear up the rules-based international order,” he said. “One of the big losers of that shift would be Russia, as it makes the prospect of sanctions much more likely.”

Bar chart of % change against US dollar since September 1 showing Performance of EM currencies has sharply diverged

Geopolitics is also a key concern for the Turkish lira. Mr Biden has indicated the US could impose sanctions on Turkey for its purchase of Russian missiles, a serious threat given the country’s reliance on external financing. Analysts fear that while President Trump has refrained from invoking sanctions in response to the missile purchases, Mr Biden could take a different stance.

Investors are also anticipating that economies with close ties to the US, or those sensitive to an uptick in global trade, should be the biggest winners from a change in the White House.

“If there’s a strong US recovery and a more pro-trade stance then Mexico should be a beneficiary,” said Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management. “It’s the economy that’s most closely linked to the US.”

Oliver Blackbourn, fund manager on the Janus Henderson multi-asset team said the Singapore dollar and the Korean won are among the best-placed currencies to benefit from a softer tone towards China and the prospect of a boost to the global recovery.

Still, some investors are nervous about taking the leap back into emerging markets, discouraged by low interest rates, concerns about how countries are controlling the spread of coronavirus and the economic growth outlook.

Marvin Barth, head of currency and emerging market macro strategy at Barclays, said uncertainty over Covid-19 and its impact on growth, together with the risks around the election, are keeping some investors on the sidelines.

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“Investors are feeling more confident about fiscal and monetary support coming after the election, supporting riskier assets including emerging markets,” Mr Barth said. “But in the context of broader uncertainty, they appear reluctant to take positions ahead of the US election”.

Line chart of Likelihood of victory based on betting averages (%) showing Betting odds indicate big lead for Joe Biden in presidential race

But the Federal Reserve’s vast asset purchases and the anticipation of a further spending package from the US government are helping to assuage concerns about riskier assets. Flows into emerging-market equity funds hit a six-week high in the week to October 21, according to EPFR data.

Ed Al-Husseiny, a currencies and rates analyst at Columbia Threadneedle, said more steps to boost the economy in the US will eventually push investors towards riskier investments with higher returns, while boosting the prospects of a global recovery.

“If there is additional stimulus either from the Fed or from the government, emerging markets currencies will get bid because investors will have no choice but to find yield,” said Mr Al-Husseiny.



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