Analysts at Bank of America predict that after the return of Republican Donald Trump to the White House and his initiation of a trade war against China, the currencies of developing countries will fall by at least 5%.
Points of attention
- Analysts predict that Donald Trump's return to the White House and his trade war against China will result in a 5% decline in the currencies of developing countries.
- The imposition of 40% tariffs on Chinese goods could lead to a significant fall in the yuan, affecting other emerging market currencies as well.
- Low oil prices and falling currencies are expected to put pressure on high-yield sovereign debt, prompting investors to pull money out of developing countries.
- Initial recommendations suggest buying the dollar against emerging market currencies, but analysts anticipate the dollar to peak in early 2025.
- Strategists recommend keeping an eye on assets from Brazil, Hungary, Poland, and Turkey, while waiting for the dollar's peak before making significant investment moves.
What is known about Trump's plan to collapse the currencies of developing countries
It is noted that Bank of America's team of strategists, led by David Honer, expects the key blow to be felt by the Chinese yuan.
In particular, analysts predict that if the Trump administration imposes a 40% tariff on Chinese goods, the yuan will fall to 7.6 per dollar already in the first half of next year.
The 60% tariffs would send the yuan down to 8 to the dollar from its current level of around 7.24.
This will affect assets in other emerging markets.
What do analysts predict against the backdrop of a strengthening dollar
In addition, Hohner predicts that amid falling emerging market currencies, low oil prices could put pressure on high-yield sovereign debt, widening spreads by as much as 100 basis points.
The analyst predicts that investors will begin to withdraw money from developing countries.
Markets are not only complacent about the size of tariffs, but also about their side effects for global growth and the possibility of triggering a hard landing, Hohner emphasizes.
MSCI's index of emerging market currencies has weakened about 1% since Trump secured his return to the White House amid fears of additional trade tariffs and signs of an escalating Russia-Ukraine war. Eastern European currencies were the most affected.
Analysts at Bank of America warned that the development of the trade war between the United States and China could prompt the purchase of some assets in the markets of developing countries amid expectations of a significant increase in the dollar during the first half of 2025.
However, at the moment, strategists recommend buying the dollar against emerging market currencies, especially against the yuan and the South African rand.
They also like local bonds from Brazil, Hungary, Poland and Turkey, but advise waiting for the dollar to peak in early 2025.
