FXTM – Emerging Markets & Trump’s Great America Experiment

As part of global forex broker FXTM’s pledge to educate investors on the markets, Jameel Ahmad, FXTM’s Vice President of Corporate Development and Market Research, recently shared his insights on the effects of Donald Trump’s expected economic policies on the outlook for the emerging market currencies, at a briefing event in Malaysia.

Trump’s Great America experiment, which combines protectionist policies towards domestic US companies with reduced red tape and lower taxes, is already impacting the USD and emerging market currencies. With expectations that his policies will be positive for the US economy and encourage stronger economic growth, the market has been buying the Dollar and this has pressured global currencies. With the probability of the Federal Reserve raising US interest rates in December reaching as high as 100% in November, the USD has moved to levels not seen in 12 years, and this has led to a sharp acceleration in selling momentum for the emerging market currencies.

Commenting on the impact of a rising USD on the emerging markets, Jameel said: “The Malaysian Ringgit and the Indonesian Rupiah, along with other EM currencies have all taken a hit. The Chinese Yuan has stumbled to historic lows against the USD on a repeated basis, but the plunges in the EM currencies have very little to do with the local economies and everything to do with the USD gathering strength. While the sharp downturn of losses for these currencies might be worrying on headline and drawing concern domestically, what needs to be realised is that this is a USD story and it has been USD domination throughout the currency markets in recent weeks. Aside from emerging market currencies, the USD has also steamed ahead against major currencies with the USDJPY exploding from 101 to 113 in three weeks and the EURUSD falling sharply from 1.13 to 1.05 in a similar timeframe.”

However, according to Jameel, the situation is not entirely gloomy for EMs, as growth in these markets is still likely to keep outpacing that of developed economies despite slowing global growth and a stronger USD. In fact, opportunities arising from Trump’s policies may also present themselves.

Discussing the potential benefits to EMs, Jameel said: “While I understand seeing an emerging currency falling sharply against the USD in a short period of time drawing concern domestically, what these markets need to do is monitor their individual currency against a basket of different currencies. When doing this, it will become apparent that fluctuations against other currencies, aside from the USD, are far more consistent and that what is currently happening in the market place is a USD story where the Dollar is strengthening against most major currencies. This means that these currencies are remaining competitive against each other, and that it could actually become an issue for the United States in the future if its own exports are too expensive due to the strength of the USD. When speaking about protectionist policies, what the market has not focused on enough quite yet is that protectionist policies would in theory require a weaker USD, and that the current strength of the Dollar is actually making its own products less competitive.”

The risks to EM economies are more likely to come from higher inflation due to an unexpected rise in import costs and the threat of increased capital outflows following the sudden declines in their currencies. There are also concerns on a wider level around slowing global trade, which is a threat to emerging economies with most of these markets being reliant on export demand. Any knee-jerk reactions from central banks is also a threat and if investors see a central bank panic, this will make investors nervous and lead to more uncertainty for local economies.

Highlighting the example of Malaysia, Jameel noted: “Bank Negara has ample foreign reserves in place if market volatility continues at the current high levels, but there’s nothing the central bank can do to prevent the USD from gaining strength except by establishing an exchange peg with this being a last resort measure. The recent weakness in the Ringgit and other EM currencies is due to external circumstances encouraged by the market trend being long Dollar and the definition of a trend is that it will change sooner or later, so a currency peg would risk making the current situation permanent as opposed to a simple market fluctuation. Additionally, a currency peg is not a flexible tool and when establishing a minimum exchange rate you are committing yourself towards respecting this exchange rate for a significant period of time. Reversing the decision later on due to the external circumstances of the market trend no longer being long Dollar would have a knock-on effect on credibility and investor trust that would be far more detrimental to the local economy than the current market fluctuation.”