Resource-Rich Currencies Battered as China's Economic Slump Persists

The currencies of resource-rich nations like Brazil and Canada are weakening as China's prolonged economic downturn continues, exacerbated by uncertainty over Beijing's stimulus measures, reports Nikkei Asia.

These currencies have been declining against the US dollar since October. The Brazilian real hit a record low against the greenback this month, reaching 6.1, while the Canadian dollar and New Zealand dollar also fell to their lowest levels since April 2020 and November 2022, respectively.

One factor contributing to the currency weakness is the economic fundamentals of each country. Brazil's recent announcement of a spending cut plan, including income tax exemptions for low-income earners, has raised concerns about fiscal consolidation. The Central Bank of Brazil intervened in the foreign exchange market on Friday to prevent further real depreciation, but the effect was short-lived.

"As long as fiscal concerns are not dispelled, the trend of the real's depreciation is unlikely to change," said Yuta Maeda, SMBC Nikko Securities senior economist, to Nikkei Asia.

New Zealand and Canada's sluggish economies are also fueling speculation of continued interest rate cuts in both countries.

However, a significant factor driving the selling of these resource-rich currencies is the prolonged downturn in the Chinese economy. Many of these currencies are strongly linked to China's economic performance, and investor disappointment over the lack of concrete stimulus measures from Chinese authorities is driving selling pressure.

While China's Central Economic Work Conference this week decided to increase the ratio of the fiscal deficit to GDP in 2025 to support the economy, specifics about the fiscal and monetary easing measures remain unclear.

"As uncertainty about the Chinese economy has not disappeared, the selling of currencies highly dependent on China is spreading further," said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute.

The People's Bank of China is attempting to stem the yuan's depreciation by setting the currency's reference rate at a higher level than prevailing market rates. However, this is often leading to increased selling of resource-rich currencies as an alternative.

The US presidential election results may also be influencing investor sentiment. President-elect Donald Trump's previous threats to impose tariffs on BRICS members, including Brazil, if they attempt to replace the dollar with a bloc currency, are creating uncertainty.

"The next focus will be on whether Chinese authorities can come up with concrete policies to support the economy at the National People's Congress in March," Nishihama concluded.