The RUB and many other EM currencies has been struggling due to geopolitical issues as the new round of US sanctions in April, which was the toughest since 2014, resulted in a significant RUB weakening, not least because it increased the risk of further sanctions, suggests the research team at Nordea Markets.
“The political calendar in general is not helpful. Some of the countries with currencies most vulnerable to USD appreciation have presidential elections this year: Mexico, Brazil and Turkey. While uncertainty surrounds the outcome of the two former, President Erdogan looks set to extend his time in office with another five years. In Mexico, the leftist nationalist Andrés López (AMLO) is currently the favourite to win and is generally seen as market unfriendly.”
“The Brazilian election in October is completely open with no clear favourite. Brazilian politics has been plagued with corruption, and the big question is now whether a new candidate will arise to bring credibility back into the political system and also deal with the pension system that is hurting the public finances.”
“Trade policy is another important element on the risk list. Despite willingness to hold bilateral talks from both China and the US, tensions will likely linger. China will not accept some of the demands from the US such as a USD 200bn cut in its trade deficit. It might also retaliate against the US’ decision to ban the Chinese state-owned ZTE from buying hardware and software from the US for seven years, though it seems that President Trump has already intervened. The US is expected to propose further restrictions on Chinese investment in the coming weeks. Thus, the possibility of an escalation of the China-US conflict cannot be ruled out. Moreover, the NAFTA negotiations are not yet done, which is a huge risk to Mexico.”
“In Central and Eastern Europe, structural fund inflows could be much lower from 2021 as indicated in the draft medium-term EU budget and may even be tied to basic requirements on democracy and rule-of-law, where the EU Commission is not overly impressed with developments in Poland and Hungary at present.”
“Political risks also include EM FX-positive elements. Argentina has asked the IMF for a precautionary funding arrangement, and the Turkish central bank may be allowed to do its job once President Erdogan has been re-elected.”