Claire Dissaux and Elisa Baku, from Millennium’s Global Economics & Strategy team, analyse the impact on EM currencies from Coronavirus.
While the spread of the coronavirus has been so far contained, its macroeconomic implications are bound to be global in view of the integration of China in the global economy. This note aims at assessing the impact on EM currencies in particular.
– We see four main macro channels of transmission from the epidemic:
- first, an impact from slower demand from China, not only on goods exports but also tourism spending;
- second, an impact on global supply chains in the industry;
- third, an impact on the global risk environment/asset markets;
- fourth, a contagion effect on local business and consumer sentiment.
– As far as the first channel is concerned, while Korea, Singapore, Taiwan in addition to Australia, Japan have high exposure to China in trade for goods, Singapore and Australia also are almost uniquely (bar Hong Kong) sensitive to tourism from China.
– On the second factor, both regional Asia and Central Europe stand out as relying on global supply chains, making their currencies vulnerable to global supply side disruptions
– To gauge the third channel, we look at cross market signals. Taking into acount global factors (eg. other asset markets such as credit, equities and commodities) EM currencies (EMFX) look fairly priced according to our statistical analysis based on Principal Component Analysis and a regression. In turn, we need to focus on domestic catalysts to assess whether there are specific EM buying opportunities, as EMFX has not overshot at this stage.
– Looking at EM domestic fundamentals, we focus on the strength of growth dynamics, which will offer a buffer to the fourth channel of transmission through local sentiment, in addition to BoP strength, real interest rate differentials and FX valuation measures. On that basis, MXN, RUB, INR are attractive in our view while KRW has the potential to outperform SGD as the epidemic peaks.
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