The economic environment has become complicated for emerging currencies. Trade tensions have increased, with new tariffs about to be applied against Chinese goods. This has made China less willing to keep its currency stable in times of high stress, allowing the renminbi to depreciate below the mark of 7 yuan per dollar.
Although the perception of analysts is that the People’s Bank of China will seek a competitive devaluation below the 7 yuan, the stability upon of the currency helped to absorb the risk in the forex market. Now that the mark has been broken and new minimums are confirmed in the renminbi China Foreign Exchange Trade System (CFETS) index, the Chinese currency could be a source of instability if trade tensions between the two countries deteriorate further.
Trade tensions continue to weigh on global growth as indicated by weak growth in China and Germany. Raw materials have also fallen due to trade tensions and are not positive news for emerging economies and tend to weigh in on the appetite for risky assets. However, the fall in yields on global can give support to currency and emerging to leave more margin to the central banks to lower rates at a time of low domestic inflation and a Fed more dovish lastrará the dollar with a differential lower.
Foreign exchange forecasts
Analysts estimate that under current market conditions it is best to be in defensive currencies, such as the yen and the Swiss franc. In the emerging universe, they speak of the ruble, the Israeli shekel, the Korean won or the Chinese renminbi as defensive currencies due to their current account surplus and large foreign exchange reserves. But since they expect no improvement in trade tensions or in the price of oil, ruble, renminbi and won are not so attractive.
The ruble has become less attractive in recent weeks by showing some weakness. Your economy suffers if the oil is low and it suffers from the threat of sanctions by the U.S. even though the currency offers a high carry and the country has a current account surplus high. Among the non-defensive currencies, they recommend avoiding the Turkish lira and the South African rand and opt for the Indian rupee and the Indonesian rupee because their economies do not suffer so much from trade tensions and benefit from cheap oil.
On the other hand, the Brazilian real is attractive because it offers good trading (carry), offers external stimuli and seems undervalued. It is also less sensitive to trade tensions and is supported by pension reforms. To be compared, the Indian rupee is less attractive than the Indonesian rupee because certain geopolitical risks have arisen in India.