Weaker Euro Could Be Another Headache for Emerging Currencies
Weaker Euro Could Be Another Headache for Emerging Currencies
(Bloomberg) -- If history is any guide, the recent stall in the euro could be bad news for emerging-market currencies.
The damage from any significant euro decline would be most acute for the Hungarian forint and Polish zloty, according to a Bloomberg study of moves in the single currency over the past two decades. The forint and zloty are particularly exposed as their countries do substantial trade with the euro area and they are normally quoted against the euro. In Asia, the Korean won, Thai baht, and Malaysian ringgit are also vulnerable due to their open economies, while the Indian and Philippine currencies tend to be relatively immune.
The euro has gained just 30 pips this month after rallying at a rate of 24 pips a day in July. The slowdown came as euro zone fundamentals deteriorated: the increase in Covid-19 infections in the region’s biggest four countries have started outpacing those in the U.S., while August flash PMIs disappointed. Elevated speculative positioning in the euro also leaves the currency vulnerable.
While emerging-market currencies didn’t enjoy the lift one would have expected from the euro’s surge in July, this doesn’t mean they will escape the impact of a slide in the common currency. The recent strength in the euro may have helped mask a multitude of vulnerabilities across emerging markets, including poor management of virus outbreaks, political upheaval, low real yields and rising debt levels.
The following table looks at how a sample of emerging currencies have reacted to 14 previous significant moves in the euro, starting in 2000. The episodes are limited to times the S&P 500 Index was stable, to exclude the impact of changes in general risk sentiment. A “hit” occurs when the currency pair moves in the same direction as the euro. Note, the results are scaled to the 5.4% move between July 9 and July 30 this year.
| Hit Rate | July 9 - July 30 2020 | When EUR rises | When EUR falls | |
|---|---|---|---|---|
| USD/HUF | 100% | -6.9% | -4.8% | +7.0% |
| USD/PLN | 100% | -6.2% | -4.3% | +7.2% |
| USD/ZAR | 86% | -1.2% | -2.9% | +3.4% |
| USD/CLP | 86% | -5.3% | -2.4% | +2.3% |
| USD/RUB | 86% | +3.7% | -1.1% | +2.6% |
| USD/TRY | 79% | +2.1% | -2.3% | +3.2% |
| USD/THB | 79% | +1.2% | -2.1% | +0.9% |
| USD/BRL | 79% | -3.9% | -1.4% | +1.5% |
| USD/KRW | 79% | -0.5% | -1.1% | +0.9% |
| USD/MYR | 78% | -1.1% | -2.2% | +0.7% |
| USD/TWD | 71% | -0.2% | -0.8% | +0.1% |
| USD/MXN | 71% | -2.0% | +0.3% | +1.9% |
| USD/INR | 64% | -0.2% | -0.4% | +1.0% |
| USD/PHP | 64% | -1.2% | +0.4% | +1.6% |
| USD/CNY | 57% | -0.8% | -2.8% | -0.1% |
| USD/IDR | 57% | +1.5% | +0.1% | +1.5% |
| USD/COP | 43% | +2.2% | +0.8% | -0.2% |
| USD/EM Average | 75% | -1.1% | -1.6% | +2.1% |
| SPX Move | NA | +3.7% | +1.8% | +0.1% |
NOTE: Simon Flint is an emerging-market strategist at Bloomberg News. The observations he makes are his own and not intended as investment advice.
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