Your Key to Navigating the US Election's Impact
US Dollar's Surge and Its Impact on Emerging Markets
A surging US dollar has set off the biggest sell-off in emerging market currencies since the early stages of the Federal Reserve's aggressive rate-raising campaign. The JPMorgan index of EM currencies has fallen more than 5 per cent over the past two-and-a-half months, marking its biggest quarterly decline since September 2022. This decline is widespread, with at least 23 currencies tracked by Bloomberg falling against the dollar this quarter. The greenback's strength is driven by expectations that US president-elect Donald Trump will impose sweeping trade tariffs and loosen fiscal policy. For example, Trump's announcement of levies on imports from Mexico and China has had a significant impact. The Mexican peso has fallen 2.1 per cent this quarter, and China's offshore renminbi is down 3.7 per cent.Even when considering the interest earned from holding assets in local currencies, only very risky currencies like Turkey and Argentina have shown positive returns for investors this quarter. The breadth of the post-election sell-off has also affected carry trades, where investors borrow in lower interest rate currencies to buy higher-yielding EM currencies. A basket of popular EM carry trades tracked by Citi has returned only 1.5 per cent this year.Specific Challenges Facing Different EM Currencies
Analysts note that weakness in the Mexican peso can be attributed largely to tariff developments. However, for many other EM currencies, the picture is more complex. In China, concerns about the slump in the domestic economy and the prospect of further central bank easing policy are weighing on the currency. Yields on China's benchmark 10-year bonds have fallen below 2 per cent to their lowest level in 22 years.In Brazil, concerns about deficits and debt sustainability are driving the real to record lows. It has broken through the threshold of six to the dollar despite a new government promise to find cost savings. "Brazil has a fiscal crisis on its hands," says Ed Al-Hussainy.In South Korea, the won was hit after President Yoon Suk Yeol declared martial law (a decision he later retracted). The surging dollar has also pushed the euro lower, affecting EM currencies that "orbit the euro" like the Polish zloty and the Hungarian forint.Macquarie's Thierry Wizman highlights that the sell-off in developing market currencies has revived the "Tina" investment narrative, suggesting there is no alternative to investing in the US. "There aren't any emerging markets these days that stand out as having robust economic stories," he adds.Additional reporting by Joseph Cotterill in London provides further context and details to this complex economic story.Unraveling the Dynamics of Emerging-Market Currencies
Inflation and Federal Reserve Bets
Emerging-market currencies saw a trimming of losses after inflation in the US came in line with expectations. This solidified bets that the Federal Reserve will lower interest rates. An index of emerging market currencies traded flat after the data, offsetting part of the negative sentiment sparked by a weakening yuan earlier in the session. An index of emerging stocks also fell for a second day. This shows the interconnectedness of different markets and how one event can have ripple effects.Strategist Alejandro Cuadrado from BBVA in New York noted that the data was generally in line with expectations, and this led to a period of less volatility and less noise. Traders priced in about 23 basis points worth of easing at the Fed’s December meeting, compared to 20 basis points prior to the inflation report. Markets now see a roughly 92% probability that the Fed will lower its benchmark by a quarter-point next week.
Yuan's Tumble and Its Ripple Effects
The Brazilian real and the South African rand were leading advances, while Asian and Eastern European currencies posted the biggest losses. Earlier, the offshore yuan sank as much as 0.5% to 7.2921 per dollar after Reuters reported that Beijing may let the currency weaken further next year to offset the impact of potential US tariffs under President-elect Donald Trump.China’s yuan has been falling this quarter as policymakers intensify monetary stimulus to make exports more competitive. This depreciation raises risks of capital outflows and financial instability, which could ripple through emerging markets tied to demand from the world’s second largest economy. The correlation between China’s exchange rate and a broader developing-nation FX gauge climbed to the highest since June, underscoring how tariff strategies between the US and China remain a central risk for emerging markets.
Other Emerging-Market Developments
In Brazil, Luiz Inacio Lula da Silva continues to recover from brain surgery. The nation’s central bank is expected to increase borrowing costs for a third straight time on Wednesday. In Ukraine, dollar bonds led gains across emerging markets, extending a month-long rally on speculation that Trump’s presidency paves the way for talks to end its fight against Russia’s invasion sooner. In South Africa, the inflation rate crept up by less than expected in November amid benign food-price growth, creating room for the central bank to cut borrowing costs again next month.These various developments in different emerging markets highlight the complexity and diversity of the global economic landscape. Each country and region is facing its own set of challenges and opportunities, and understanding these is crucial for investors and policymakers alike.
Unraveling the Crypto Conundrum: ASIC's Impact on Australia's Digital Assets
Controversial Analogy and NCP Concerns
Rhys Bollen's comparison of Bitcoin to cigarettes used as currency in prisons during a Wednesday meeting has raised eyebrows. An NCP refers to any payment method not involving physical cash, including digital wallets, credit cards, and cryptos. The example focusing on using stablecoins for payments has led to concerns that any digital asset enabling payments could be classified under the NCP. When pressed for clarification, Bollen admitted the complexity, stating that in theory, almost anything could be used for payments, like cigarettes in prisons. This analogy has drawn both praise and criticism.Industry leaders are worried that applying financial regulation to tools like non-custodial wallets or software could stifle innovation and drive businesses overseas. Michaela Juric, general manager of Programs and Partnerships at the Australian stablecoin project AUDD, criticized the potential implications for widely used crypto tools like MetaMask. She pointed out that if one of MetaMask's primary functions is to allow user payments, it may need to obtain an AFSL to serve Australian users. "Trying to apply financial regulation and licensing obligations to mere software will push the already growing exodus of products and services out of Australia," she added.
The INFO-225 consultation paper released earlier this month proposes updated guidance for compliance with the Corporations Act. It includes 13 examples demonstrating how digital assets like stablecoins, staking services, and tokenized securities could be classified as financial products. This has added to the confusion and uncertainty in the crypto space.
Tightening Crypto Regulation in Australia
Australia has been ramping up its control over crypto regulation. ASIC has encouraged crypto companies to apply for an Australian Financial Services Licence (AFSL), offering a grace period from legal action during the application process. However, companies must justify their decision if they choose not to apply.In October 2023, the Australian Treasury released a consultation paper proposing to regulate digital asset intermediaries under the existing financial services licensing framework. This aims to address consumer harms while supporting innovation within the crypto ecosystem.
ASIC has also revised Regulatory Guide 133 (RG 133) for the first time since June 2022, introducing new requirements for crypto custody. Key changes include enhanced security protocols such as cold storage and geographically distributed key backups, stricter risk management processes, and multi-signature transaction controls.
Public feedback on INFO-225 remains open until February 2025, with finalized guidance expected later that year. The crypto industry in Australia is anxiously awaiting the outcome of these regulatory changes and their impact on the future of digital assets.