Barclay’s: Shot in the arm: Post-US election and COVID vaccine implications for EM

Markets are shifting towards the emerging post-election narrative of lower  market vol and further reduction of risk premia. This reflects the likely reduction of event risks associated with a messy post-election environment, implied shifts is US trade and foreign policy, and optimism over the potential for a higher-than-expected efficacy vaccine to contain COVID- 19.

  • These policy dynamics suggest relative strength, particularly for East Asia (CNH, KRW, TWD, etc.) and China-linked commodity currencies (ZAR, CLP, BRL etc), but also for Europe (euro area-linked satellites in CEE), with a ratcheting down of transatlantic trade tensions.
  • We do not expect EM FX to be universally strengthened by a Biden win. Oil-sensitive currencies are likely to underperform if President Biden re-commits to the JCPOA.

Expectations for a more stringent implementation of Russia and Turkey sanctions are better priced, but continued uncertainty on their content imply RUB and TRY underperformance for now.

 

Continued vaccine progress is likely to reduce risk premia more broadly in EM assets, in particular the low-quality names. Alongside a message of lower for longer rates from global central banks, this should support higher-yielding EMs versus the lower-yielding/higher quality names.

  • The mix of a more effective pandemic response, continued monetary policy accommodation by global central banks and a potential vaccine roll-out in 2021 aid risk-positive moves in EM local fixed income.
  • Trade ideas in FX: We recommend short USDINR NDF and remain short USDMXN via put spread, short EURPLN spot, long CNHPHP NDF and short TWDINR NDF.

 

EM FX: A confluence of positive factors

Even without unified control of Congress, we expect a robust set of emergency policies to address the pandemic to be a risk-positive outcome for markets (albeit a smaller one for EM FX relative to expectations under a progressive Blue Wave outcome). The medium-term support for EM FX is underpinned by continued monetary policy accommodation by global central banks, alongside additional potential vaccine announcements in late 2020 and a possible roll-out in 2021.

Trade-related uncertainty is likely to diminish with a more multilateral approach under a Biden presidency. We view this scenario as consistent with weaker demand for the USD safe haven vs. EM.

The post-US election policy dynamics suggest relative strength, particularly for East Asia (CNH, KRW, TWD etc) and China-linked commodity currencies (ZAR, CLP, BRL etc), but also for Europe (euro area linked satellites in CEE), with a ratcheting down of transatlantic trade tensions. We also expect continued progress towards a broader roll-out of an effective COVID-19 vaccine to reduce risk premia more broadly in EM assets, in particular the low-quality names. Overall, we see this alongside a message from global central banks of lower for longer rates supporting  higher-yielding EMs such as those in LatAm and South Asia versus the lower-yielding/higher quality names.

For the broad USD, even without more significant shifts in fiscal/tax policy, the effects of more regulation under a prospective Biden administration are likely to reduce the attractiveness of the US as a destination of investment. Overall, with a modest shift in the regulatory posture, we see this, along with the positive risk/global trade/vaccine backdrop, implying a moderately weaker USD over the medium term.

We do not expect EM FX to be universally strengthened by a Biden win, of course. Oil-sensitive currencies such as the RUB and COP are likely to underperform if President Biden re-commits to the JCPOA (creating a positive oil supply shock through more Iranian production hitting the open market). And a more stringent implementation of Russia and Turkey  sanctions under Biden would be negative for the RUB and especially the TRY, given its dependence on external financing. However, even though these risks are better priced at current RUB and TRY levels, continued uncertainty on the content of any sanctions imply RUB and TRY underperformance relative to the rest of EM.

 

 

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.