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We did a brief study of price action for USDCNY and other Emerging market currencies against USD to see if recent CNY weakness is impacting other EMs also. The research suggests that as of now CNY weakness seems to be standalone and other EMs have not weakened with CNY. It is just an initial phase of trade war where a lot more could happen. We need to be tuned for more developments.
The details are below:
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During April 2018 till mid May 2018, crude prices and US ten year yields were rising as a result most Emerging Markets (EM) currencies saw weakness in range of 5%-17%. CNY was an exception and it remained near flat with only 1% weakness. At that time, market concluded that CNY is no longer an Emerging market currency having its own strength and therefore does not follow weakness of other Emerging markets.
Towards end of May, Crude prices and US ten year yields started to stabilize and Emerging markets weakening also paused. Around 29th May when US imposed 25% duty on USD 50 bn of Chinese imports, the simmering trade war picked up pace. As a result, CNY started weakening. Surprisingly EM currencies did not follow CNY weakness & remained flat.This was the second time when CNY and EMs did not have correlation.
The above patterns tell that in coming days, INR may not be much impacted by movement in CNY. INR may be immune to CNY movement but may not follow it 100%. INR would be more guided by oil prices and movement in other Emerging markets.
Please find below graph of movement of Emerging markets against USD since April 2018.
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*Disclaimer: Best efforts have been made to present the analysis and data as correctly as possible. However, it is prone to errors and therefore clients are expected to do their own analysis, independent of what is shared above, before taking decisions. This is neither a solicitation nor a recommendation to Buy/Sell any currency. No representation is being made that any suggestion being made above will necessarily result into profits and principals/employees/