EM currencies likely to weaken; Chilean peso an exception

Optimism about an imminent resolution to the trade war between the US and China and subsiding protests in Latin America have supported EM currencies over the past month. But, barring a few exceptions, we think that they will weaken against the US dollar over the next year or so. This is because we expect growth to slow further in China and remain subdued elsewhere, regardless of how the US-China trade war plays out. With this in mind, we doubt that the outperformance of Asian currencies with close ties to China will last. While we are pessimistic about the outlook for the renminbi and other Asian currencies, we think that the currencies of countries with large current account deficits, high short-term external debt or persistently high inflation will fare worst in 2020. One bright spot is the Chilean peso. The peso has been one of the worst performing currencies this year as country-wide protests have added to worries about the economic outlook. However, the currency has now fallen too far in our view. Given our forecast that Chile’s central bank will intervene further to stabilise the currency and that the price of copper – Chile’s main export – will rise next year, we suspect that the peso will be one of the best performing currencies against the dollar in 2020.