Geopolitical developments, in particular the protectionist economic policies of the US, are increasing capital flight from emerging markets. Investors are pulling out of risky investments, putting increasing devaluation pressure on EM currencies.
Short and Medium Term Impact
Countries with close trade links to China, such as India and Indonesia, are particularly affected, and their currencies are already suffering significant losses. In the longer term, the trend towards capital flight could lead to structural changes as emerging markets seek alternative trading partners and payment systems to reduce their dependence on the US dollar.
Risk-Off Scenario and Countries Affected
Rising risk-off sentiment is leading to a shift into safe-haven assets, with carry trade currencies such as the Mexican peso, Brazilian real and Indian rupee being sold off. South Africa is comparatively stable but remains vulnerable to commodity price movements.
Conclusion
The future performance of EM currencies will depend on monetary and economic policies. Greater regional cooperation and diversification of trade relations could lead to greater stability in the long run. Given the geopolitical uncertainties, investors should adopt a differentiated approach to risk management.
