Fate of emerging market currencies may just lie with US voters

Washington

FOR clues on likely swings in emerging-market currencies, keep a close eye on US public attitudes towards China.

The logic works like this. The more inclined American voters are to engage in China-bashing, the more likely it is that President Donald Trump will slap fresh tariffs on Chinese goods. That in turn may provoke the People's Bank of China into weakening the yuan at its daily fixings, triggering another bout of currency volatility.

Increased turmoil in foreign-exchange markets is the last thing developing markets need right now as bellwethers such as the Turkish lira and Brazilian real trade at or near all-time lows. Currency swings haven't eased as much for the emerging markets as they have for the leading economies since they climbed to the highest since 2011 in March. And for David Dollar, a senior fellow at Brookings Institution, the prospect of another spike in volatility is very real.

"There's a greater than 50 per cent chance that we will see additional tariffs against China before the presidential election," Mr Dollar, an expert on US-China economic relations, said in an interview from Washington.

Until now, the Chinese authorities haven't been provoked by Mr Trump's sabre-rattling. One key signal for the currency came with the central bank's daily fixing on May 6, which was slightly stronger than expected, suggesting China's willingness to limit volatility. The offshore yuan peaked at 7.1561 on May 4 during this month's holiday, while the onshore fixing rate peaked at 7.0931 on May 7.

If Mr Dollar is right, there would be a significant sell-off in the yuan to offset the cost of the tariffs. And there are real reasons for concern. A recent Pew Research Center poll found that 66 per cent of Americans hold unfavourable views on China, and with the US economy struggling from the pandemic, Mr Trump may look to exploit that to win votes. Washington could point to Beijing's failure to get close to the run-rate for purchases called for under the trade agreement, however unreasonable that could seem under the circumstances of Covid-19. BLOOMBERG