High demand for bonds and the recovery of the German economy may become a catalyst for the growth of European currencies
The trade war taught us to believe in the dollar. The US economy is resilient to a slowdown in international trade and global GDP due to the lower share of exports in the gross domestic product than, for example, in the eurozone. Demand for securities issued in the United States is high, and regardless of whether the Fed raises or lowers rates, the USD index feels comfortable near historical highs. Nevertheless, everyone is eager to put an end to the trade war, including the White House. So, it’s time to think about where to invest in the case of signing an agreement between Washington and Beijing?
In 2019, among the most surprising assets, currencies of developing countries often appeared. High geopolitical risks; periodically erupting political conflicts in Latin America, Turkey, and Russia; depressed state of the raw materials market; finally, a stably strong dollar made it possible to speak of an external background unfavorable to them. If we add the aggressive monetary expansion to this, we can only puzzle over why EM currency units occupy leading positions in Forex? The top five performers of the year are the Russian ruble (+ 8.7%), the Indonesian rupee (+ 2.1%) and the Mexican peso (+ 1.5%), while the currency index of developing countries is above the 200-period moving average, which indicates about the uptrend.
In my opinion, the reasons should be sought in the context of the global debt market. A significant outflow of capital in 2015-2016 in the United States and Europe led to the fact that there are currently more buyers of bonds issued in developing countries than sellers. They give great returns. According to Credit Agricole, this, coupled with the weakening of the US dollar in 2020, will make EM currencies a tidbit.
At the same time, the analyzed asset class is quite large, so a selective approach and an investment idea are needed. In my opinion, the end of the trade war between the US and China, the orderly Brexit and the restoration of the German economy in 2020 significantly increase the chances of the currencies of Eastern Europe.
Let’s remember the 2017th. The victory of Emmanuel Macron in the presidential election in France, the first over the past few years to outstrip the European GDP of his American counterpart and Mario Draghi’s hints at normalizing the ECB’s monetary policy allowed the euro to strengthen by 14% against the US dollar. Hungarian forint (+ 15%), Czech koruna (+ 17%) and Polish zloty (+ 17%) looked even better. Reasons to look for in the export structure. 88-90% of all deliveries from Hungary, the Czech Republic, and Poland go to Europe, 27-32% – to Germany. The depressed state of the German economy has a negative impact on the position of the bears in USD / HUF (+ 8.3% since the beginning of the year), USD / CZK (+ 3.1%) and USD / PLN(+ 4.2%). In 2020, in connection with the end of the trade war in 2020, the situation should radically change, which allows us to predict the strengthening of the forint, kroon, and zloty by 5-7%.