Trump’s trade war to wreck emerging market currencies - Bank of America
Photo: Trump will crash the yuan (Getty Images)
Investors are underestimating the risks of a trade war under Donald Trump’s presidency, according to strategists at Bank of America. They predict a 5% slide in the currencies of emerging markets in the first half of 2025 and a sell-off of sovereign bonds, Bloomberg reports.
Bank of America strategists, led by David Hauner, expect the main impact to be on the Chinese yuan. If a new US administration imposes a 40% tariff on Chinese goods in the first half of next year, the currency could drop to 7.6 per dollar. A more substantial 60% tariff would mean the yuan would fall to 8 per dollar, compared to the current level of around 7.24, they add.
Hauner noted that this will affect other assets in emerging markets. While the currencies of emerging markets could fall by 5%, lower oil prices could pressure high-yield sovereign debt, expanding spreads by as much as 100 basis points, he predicts. As in the 2018 trade war, "there will be a capital outflow from emerging markets and a higher risk premium."
"Markets are not only complacent about the size of the tariffs, but also about their side effects on global growth and potential to trigger a hard landing," Hauner wrote, noting that new tariffs would come into effect at a time when economic activity is already much weaker than in 2018.
The MSCI index for emerging market currencies has weakened by about 1% since Trump’s return to the White House, amid concerns about additional trade tariffs and signs of escalation in the Russia-Ukraine war. Eastern European currencies have been hit hardest.
If the trade war develops, Bank of America believes there may be an opportunity to buy into some emerging market assets, with the dollar expected to peak in the first quarter. However, for now, strategists recommend buying the dollar against emerging market currencies, particularly against the yuan and South African rand. They also like local bonds in Brazil, Hungary, Poland, and Turkey but suggest waiting for the dollar to peak in early 2025.
It’s worth noting that the dollar has been rising against major global currencies for eight consecutive weeks. The euro has fallen to a two-year low of 1.03 per dollar as Trump plans to impose tariffs on imported goods. Investors are not ruling out the possibility that the euro/dollar exchange rate could reach parity.
