* Trading relatively thin on holiday
* South African economy seen shrinking 5.8% in 2020
* Central European currencies fall
By Ambar Warrick
May 1 (Reuters) – Emerging market currencies slipped on fears of a renewed Sino-U.S. trade war on Friday, amid thin trading volumes as most financial markets in Europe, Africa and Asia were closed for Labour Day.
U.S. President Donald Trump on Thursday threatened fresh tariff action against China over the coronavirus outbreak.
The move set a dour tone for future negotiations, given that Washington and Beijing were yet to fully de escalate their nearly two year-long trade war, with a phase-one deal in 2019 serving only as a placeholder.
Russia’s rouble and the South African rand fell more than 1% each to the dollar. The MSCI’s index of developing world currencies retreated 0.5%, having gained 0.6% in April.
“This is likely to put a serious dent in the head-scratching, math-defying risk-on rally we have seen for much of the week,” Michael Every, global strategist at Rabobank, wrote in a note.
“…(as) now month-end positioning is out of the way, it has the potential to open up an entire new phase of USD buying vs. EM in particular.”
He added that the Chinese yuan would not be spared from the pressure, in offshore and onshore trade.
While emerging market currencies had benefited from some recovery in risk appetite over the past month, a renewed Sino-U.S. trade tiff could exacerbate the economic damage caused by the coronavirus and result in massive capital outflows from the developing world.
South Africa’s economy, which was already in recession prior to the outbreak, is expected to contract by 5.8% in 2020. The outbreak is expected to weigh heavily on developing markets that lack the fiscal strength to combat the economic shock.
Central European currencies such as the Hungarian forint and the Czech koruna fell to the euro after the European Central Bank held back from providing another hit of stimulus to the economy.
Data also showed the euro zone economy shrinking at a record rate in the first quarter.
For GRAPHIC on emerging market FX performance in 2020, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2020, see tmsnrt.rs/2OusNdX
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For RUSSIAN market report, see (Reporting by Ambar Warrick in Bengaluru; Editing by Rashmi Aich)
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