BRICS Summit: Dedollarization Risks Ease
2023.08.22 10:31
- Xi meets Ramaphosa and discusses how to bolster trade in their own currencies
- Yuan still weakens despite PBOC’s most forceful fixing on record
- BRICS might lead to more investment in Africa, potentially bolstering rand
The annual BRICS Summit begins in Johannesburg, with China’s President Xi meeting South African President Ramaphosa. China and India have enjoyed 25 years of diplomatic ties and are looking to bolster trade and investment with more countries. The three-day summit will be attended by leaders of China, India, Brazil, and South Africa, as well as 30 African leaders. Russian President Putin will be participating via video conference as he has an international arrest over alleged war crimes in Ukraine. Russian Foreign Minister Lavrov will represent Russia at the summit.
BRIC nations make up a quarter of the global economy, so their voice will clearly be listened to, especially if they expand. So far, 22 other countries have formally applied to join the bloc, but it seems difficult for the institution given they do not have a BRICS currency that can challenge the dollar.
The current members have lots of challenges to go all-in with de-dollarization and embrace a BRICS currency. India does not want a China-led initiative. Given all the sanctions Russia is facing, they have billions of rupees that are stranded. There is no easy solution that can address all the problems facing the key members, which means they will take small steps, which include expanding the use of a development bank to help with lending.
5-year USD/CNH, USD/INR, and USD/BRL
5-year USD/CNH, USD/INR, and USD/BRL Chart
The 5-five year chart above shows how robust the dollar has been against the and Rupee in 2023, with Brazil and their attractive interest differential being the one standout. Alternatives to the dollar in trade will grow, but for now the big risk is the great refinancing that will occur over the next year could lead to extreme turmoil for emerging markets and that might keep the dollar supported against most of the BRIC currencies.
The weekly and chart below exemplifies how overbought this dollar trade has become. There is a lot of macro risk on the table this week and FX markets could see either a strong extension of dollar strength or a major pullback.
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