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What's driving EM and commodity currencies

• Currency volatility remains subdued and European currencies, the Chinese Renminbi and even the Brazilian Real and South African Rand, have done little year-to-date.

• However, a number of developed and emerging market currencies have seen rapid appreciation or depreciation and a number of explanatory factors are likely, going forward, to keep influencing these currencies’ paths.

• These include the impact of commodity prices on  trade balances, capital account flows, trade-war concerns’ bearing on global risk appetite, central bank monetary policy, including FX management, expectations for policy rates and country-specific issues.

• The positive relationship between the change in merchandise trade balances and currency performance should not be under-estimated.

• Countries with trade balances which have only deteriorated very modestly (e.g. Mexico) or even improved (e.g. Malaysia) have generally seen their currencies outperform. Conversely, countries with significant and widening trade deficits (Turkey, Philippines) have seen their currencies depreciate the most in the past year.

• There are outliers, including Russia and Poland and to a lesser extent the Indonesian Rupiah and Thai Baht. The Rouble and Rupiah have underperformed due in part to capital account outflows while the Zloty and Baht have outperformed with the Zloty benefiting from Poland’s rapidly increasing outsourcing revenues.

• The significant rise in global commodity prices has driven very rapid export growth in most major commodity producers, bar perhaps Canada, and we remain bullish the Norwegian Krone. However, import growth has also been elevated, particularly in Indonesia and South Africa, which has weighed on these currencies’ trade balances and currencies.
• Conversely a number of non-commodity economies, including China, Korea, Singapore, and Poland, are riding the pick-up in global trade and recording strong export growth rates which has in particular provided support to the Singapore Dollar.