Emerging currencies hit 17-month low over fears of trade war escalation

Goldman Sachs says its models signal further declines for some developing nations

A picture shows a digital billboard giving updates on various currencies in Istanbul on August 13, 2018. AFP

The sell-off in emerging markets deepened on speculation the US and China trade war will escalate. Currencies slumped to their lowest level since April 2017 as Goldman Sachs said its models signaled further declines for some developing nations. Stocks also fell.

Brazil’s real led losses among its major peers amid intense volatility before a new election poll. The Argentine peso slid after some traders said the rally triggered by optimism the International Monetary Fund will expedite funding went too far, too fast. Turkish data showing the economy expanded less than forecast overshadowed bets on another rate hike, pushing down the lira. The rupee pared its drop as India said it is considering a plan to tap its citizens overseas after the currency tumbled on gloomy current-account data.

Investors pushed down the value of developing-nation assets as President Donald Trump insisted his trade war with China will spur more manufacturing jobs in the US, following Friday’s threats to impose higher tariffs on the nation’s goods. The remarks added even more concern for emerging markets already facing challenges that include the end of an era of cheap money as well as struggles by governments from India to Argentina and Turkey to restore confidence in their economies.

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And the situation doesn’t get any better from a technical perspective. Some patterns suggest that the $4.5 trillion sell-off that has taken the MSCI Emerging Markets Index below its 20-year average valuation - normally a signal for investors to return - has further to run before reaching the point where four major turnarounds in the past 20 years began.

While this year’s sell-off has pushed emerging-market exchange rates into undervalued territory by at least one measure, they are not yet as cheap as in early 2016, analysts at the investment bank including Mark Ozerov and Kamakshya Trivedi note. Back then, the developing world was being battered by a slump in global oil prices.

“Of course, valuations are best seen as a medium- to long-term signal for asset market performance, and are rarely a catalyst in and of themselves to spark stronger performance,” they wrote. “Nevertheless a significant cheapening could provide an anchor point for investors who can take the long-term view and a buffer to weather any volatility.”