EM performance – recently and over the past year
The US dollar and global risk appetite are usually the two most important factors for EM currency performance broadly, and often dollar direction and risk appetite are strongly negatively correlated and somewhat the same thing. Still, there are inevitably many moving parts and idiosyncratic stories driving relative individual EM currency performance, even if the majority of EM currencies swim in the same direction over medium-term and longer time frames.
Chart: Short-term EM currency performance
In the short term performance charts, we note that the Chinese yuan and Asian EM currencies most firmly in its orbit (KRW, TWD, MYR, THB) have seen their performance cool notably over the last week or more, while still up over the last the one-month against a struggling US dollar. Note that USDCNY and UDSKRW have an r-squared of over 0.92 for the last 200 trading days and, meaning that the Korean Won is more or less thoroughly in the CNY’s orbit – which makes sense given the country has a nearly 11% weighting in the official CNY reference basket – fully half of that for the US dollar for an economy a fraction of the size (and a currency with orders of magnitude less liquidity). The strongest performers over the last month are those currencies mostly firmly linked to the hopeful narrative for 2021, that a post-Covid-19 vaccine recovery on its way and will see a sizable rebound in demand, with still generous monetary policies possibly driving inflation, particularly in the commodities sector. Note that all of the four strongest performers over the last month are closely linked with specific commodities, or baskets of commodities in Brazil’s case (soybeans, coffee and iron ore). On the weak side, the Turkish lira is a victim of the time window of 1-month, as the currency topped out in mid-November after a huge surge from the October lows before Erdogan announced he would take the “bitter” medicine needed of strong rate hikes to slow the rapid devaluation of the currency.