BRICS Summit: Dedollarization Risks Ease

Republished By Plato

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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 use of a development bank to help with lending.

5-year USD/CNH, USD/INR, and USD/BRL

The 5-five year chart above shows how robust the dollar has been against the yuan 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 USD/CNH and USD/INR 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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Ed Moya

Senior Market Analyst, The Americas at OANDA

With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.