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Investors Should Beware Emerging-Market Currencies as Dollar Strengthens

Investors Should Beware Emerging-Market Currencies as Dollar Strengthens

Tuesday, 15 May 2018 09:28 AM Current | Bio | Archive

The Sino - U.S. trade dispute continuous to rumble around. The U-turn on U.S. national security policy by President Trump has raised hopes for a deal in line with the normal political practices of the United States these days.

That positive news has been followed up with less positive comments, on this occasion from the U.S. Ambassador to China Terry Branstad who said that the United States wants China to give a timetable on how it will open up its markets to U.S. exports as the two countries are still “very far apart” on resolving trade frictions.

Earlier this month, a U.S. delegation led by Treasury Secretary Steven Mnuchin presented China with a list of demands to tackle allegations of intellectual property theft and other trade policies Washington considers unfair. The two countries failed to reach an agreement on the long list of U.S. demands, and decided to resume talks in Washington that are scheduled for today.

Branstad, who was present at the meeting led by Treasury Secretary Steven Mnuchin in China, said at a conference in Tokyo that there are many areas where China has promised to do but hasn’t. We want to see a timetable. We want to see these things happen sooner than later. Branstad also said that President Trump would like to see a “dramatic increase” in food exports to China and see China being just as open as the United States.

Branstad said the United States could rescind the “Section 301” tariffs if China moved forward on opening up its agriculture and auto markets saying: “I think it could be adjusted. It’s possible, depending upon how the trade talks go adding that increasing U.S. exports of liquefied natural gas could also be an area the two countries could agree on.”

Against this background, it was interesting to see the President yesterday defending his decision to revisit penalties for the Chinese company ZTE Corp. for flouting U.S. sanctions on trade with Iran and North Korea, saying the telecom maker is a big buyer for U.S. suppliers. He said: “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

Over in Europe, Italy’s political situation has not brought forth a new government, just yet.

The two “anti-parties,” the Northern League political party that advocates regionalism, federalism, populism, anti-immigration, Euroscepticism and anti-globalization, and the Five Star Movement political party that advocates populism, anti-establishment, direct democracy, E-democracy, environmentalism, Euroscepticism and de-growth, are still arguing or discussing the details of a potential coalition.

The question of who would be Prime Minister, seems unresolved so far.

Financial markets are seemingly not too concerned about this. The Italian 10-year government bond spread to Germany has widened by just over 0.01 percent over the past week, which does not suggest panicked investors are fleeing for the exits. This is a good reminder that domestic investors tend to understand domestic politics better than foreign investors. Italian financial markets are dominated by domestic investors.

If the two anti-parties do form a government, the bigger issue about such a coalition may be the media and popular reaction in, for example, Germany where larger budget deficits, tax cuts and universal income schemes, however diluted as long as (!) the ECB continues buying Italian bonds, will not be taken too kindly.

Yes, another source for tensions in the Euro area in the making that, if it would to occur of course, will be important for the euro and euro linked investments.

Finally, Turkey’s President Erdogan who ‘s doing all what he can(!) do to be reelected said yesterday: “When the people fall into difficulties because of monetary policies, who are they going to hold accountable? They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies. That may make some uncomfortable, but we have to do it. Because it’s those who rule the state who are accountable to the citizens.”

I personally can’t agree with his opinion for obvious reasons. Anyway, the Turkish lira slid to its weakest level ever against the dollar after his remarks were published, losing as much as 0.9 percent to 4.4045, and is down 14 percent this year.

Investors should watch out for practically all EM currencies, especially when the dollar strengthens further.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors should watch out for practically all emerging-market currencies, especially when the dollar strengthens further.
investors, emerging, market, currencies, dollar
Tuesday, 15 May 2018 09:28 AM
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