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A woman walks past a money exchange shop in Hong Kong on August 6. Liquid markets and round-the-clock pricing mean foreign exchange markets often have time to react before political developments can be fully reflected in other assets. Photo: AP
Opinion
Macroscope
by Hannah Anderson
Macroscope
by Hannah Anderson

From US to China, Britain to Argentina, geopolitics are roiling markets, starting with currencies

  • The US dollar, Chinese yuan, British pound and Argentine peso have been quick to feed geopolitical tensions into wider markets. As political dramas unfold, fast-moving currency markets will continue to release value for shrewd investors
Hannah Anderson
Hannah Anderson
Why you can trust SCMP
Geopolitics might as well be the theme of the year. United States-China. Brexit. Argentina. Italy. South Korea-Japan. US-Iran. Hong Kong. Each of these geopolitical flashpoints has roiled markets in recent months. New headlines invariably result in local equity market sell-offs and rallies in high-quality fixed income.

Currencies are often the biggest movers; liquid markets and round-the-clock pricing mean foreign exchange markets often have time to react before political developments can be fully reflected in other assets.

In fact, currencies are the common thread tying these geopolitical issues to markets. The drivers of the US dollar’s ascent are inseparable from politics.

The dollar’s valuation is a result of both the relatively higher real rates available in the US among top-rated sovereign debt as the Federal Reserve tries to manage the economy, and of the more defensive nature of US asset markets attracting investors seeking certainty – which have reverberated through other currencies too.
British domestic politics have been the primary mover of sterling in recent months. Continued delays in the Brexit process, the prospect of new elections, the increasing possibility of a disorderly no-deal Brexit, and the resulting uncertainty dragging on the British economy have all pushed the pound down by roughly 4 per cent in the year to date.
The drop is starker when we consider just the period of time in which Brexit headlines have been a constant. From February 27, a day ahead of the European Union’s withdrawal draft, which was swiftly rejected by Theresa May’s government, to September 5, the pound fell 8 per cent against the dollar.

A no-deal Brexit remains a low probability but the chances are higher than a week ago, owing to British politics.

Coincidentally, it was also on February 27 that onshore yuan peaked against the dollar this year. Since then, the yuan has declined by 6.5 per cent against the dollar. But the yuan drop feels more calamitous than the larger pound drop because of the speed at which it happened.
Half the year-to-date drop has taken place just in the past month; the yuan was below 7 per dollar just over a month ago. US-China trade tensions were the primary driver of this move.
After a slight reduction in tensions earlier in the summer, the US-China situation has escalated once again with no easy off-ramp. Investor focus on the yuan is understandable, given that its trajectory can provide signals for the market outlook for the broader emerging market complex.
China’s economic heft makes it an essential consideration for most emerging market allocations.

While Chinese geopolitical considerations ripple through the rest of emerging markets, the biggest recent currency mover is a much more localised story.

The Argentine peso is down 32.7 per cent this year after the business-friendly President Mauricio Macri, who is running for re-election next month, was defeated in a recent primary (though he remains a candidate). It signalled that the government may be forced to backtrack on investor-friendly reforms.

Indeed, some fiscal reforms have since been halted and Argentina is seeking to restructure its debt payments to avoid defaulting for a ninth time since 1827.

However, given investors’ general wariness of Argentine assets after prior defaults, recent political developments and the imposition of capital controls, contagion has been minimal.

Meanwhile, the political drama in Italy and Spain have weighed on the euro. The diplomatic stand-off between South Korea and Japan and between the US and Iran have shaken exchange markets as well.

Political drama certainly seems to be a global constant these days. As a result, currencies are likely to continue to release value for investors, making currency-aware investing particularly important in the remaining months of the year.

These factors – combined with weakening economic data and high investor uncertainty, which are likely to keep central bank policy easy – are likely to keep volatility high, support equity valuations and keep high-quality fixed income expensive.

Hannah Anderson is a global market strategist at JP Morgan Asset Management

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