Emerging market currencies lifted by vaccine hopes and Biden win

Positive vaccine developments and Joe Biden’s win in the US election have boosted emerging market currencies and fuelled expectations among analysts for further gains in the weeks to come.

An MSCI index measuring the performance of a basket of emerging market currencies has risen 1.6 per cent in the first 10 days of November, leaving it on track for its best month since late 2019 as growing confidence about the global economy prompts investors to take riskier bets.

The South African rand, Mexican peso and Russian rouble jumped more than 1 per cent against the dollar on Monday after the announcement from Pfizer and BioNTech about the results of the phase 3 trial of their Covid-19 vaccine.

After the initial surge, currencies like the rand have eased back from highs that had not been touched since March. However, analysts said the news from the drugmakers about the effectiveness of their vaccine together with Mr Biden’s win has laid the ground for further gains.

“Pfizer results are a game changer,” wrote Deutsche Bank currency analyst Robin Winkler in a research note.

The boost from the vaccine’s success has added momentum to the recovery in emerging markets currencies, which started after the US election. The Brazilian real has strengthened nearly 7 per cent against the dollar since November 2, while the Mexican peso, the South African climbed around 5 per cent in that period. The Russian rouble has gained nearly 6 per cent.

Bar chart of % change against US dollar since November 2 showing Several major currencies have posted big gains since election

Investors expect that a vaccine, once approved by regulators and widely distributed, will gradually allow the world to return to normal, providing a big boost to the economy. Mr Biden’s election victory has also received a positive reception from markets on hopes the former vice-president will take a more traditional foreign policy stance than Donald Trump.

“Combined with Biden’s victory over the weekend, we see plenty of potential for the current dollar weakening trend to continue, especially against [commodity-related] and emerging markets currencies,” Mr Winkler said

Luis Costa, an analyst at Citigroup, said that the bank has in recent days seen higher trading flows into the South African rand, one of the most sensitive currencies to investor sentiment.

James Lord, global head of emerging market currency strategy at Morgan Stanley, added investors had been reluctant to place large bets in currencies like the Brazilian real or its peers ahead of the election, but following Mr Biden’s win interest has picked up.

“The passing of the US election and a better macro outlook should lead to more investor appetite for allocating capital to local currency bonds, which will benefit their currencies,” Mr Lord said.

Line chart of MSCI EM FX index showing Emerging market currencies have rallied in November

Investors have been placing bets on a rise in the renminbi and currencies in Asia where domestic economic recoveries have gained momentum. Some of these wagers could filter into currencies like the rand, the real and the peso, while the Russian and Indonesian currencies could also benefit, Mr Lord said.

HSBC analysts have warned, however, that after the initial exuberant reaction in markets, “a reality check of sorts” could be on the way if there are snags in the logistics around the vaccine’s distribution. Still, they said that “material progress” on the jab would benefit emerging markets.

“The Indonesian rupiah, the Mexican peso, the Russian rouble and currencies that are more dependent on international tourism flows . . . could strengthen initially”, said HSBC analysts.

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