EM FX Weekly – Forecast adjustments

door: Roy Teo , Peter de Bruin , Georgette Boele

EM-FX-weekly-24-April-2015.pdf (321 KB)
  • More constructive on most Asian currencies…
  • …less bearish on the ruble and zloty…
  • …but more weakness seen for Turkish lira

More constructive on most Asian currencies…

We have become less bearish on the short-term outlook for the Chinese yuan, Singapore dollar, Taiwan dollar, South Korean won and Thai baht (see our FX Watch: Asian FX short-term reprive). The Fed does not look likely to hike in the near term, while there are also various positive domestic developments, with policy settings likely to be a less negative factor. However, our year-end forecasts for Asian currencies remain unchanged as we still think that financial markets are underestimating the pace of rate hikes in the US, while domestic risks remain.

…less bearish on the ruble…

We have changed our ruble forecast for this year, allowing for a stronger recovery in the currency. The economic deterioration is happening against a background of clearer signs of financial stability. Indeed, the upward momentum in inflation has abated and CDS-spreads have come down significantly, as have interbank rates. The easing of the panic that we earlier this year when the ruble was in  free fall has happened earlier than we had anticipated. Although greater financial stability will imply that the central bank will continue to loosen policy – we are looking for another 100bp cut at Thursday’s policy meeting – we think that there is more room for the ruble to appreciate now that the economy is entering a period of relative normality. In addition, an ongoing gradual rise in oil prices should help the ruble to strengthen. Therefore, we now see USD/RUB at 50 at the end of this year, down from our earlier forecast of 58.

…more upside for the zloty

We have also become more optimistic about the Polish zloty. The economy is in good shape, with employment growth on the up and wage growth having accelerated to almost 6% in March. Against this background, the NBP has said that it has ended its loosening cycle. With markets’ focus now likely to switch to the timing of the first rate hike in Poland, and the ECB likely to continue to pursue its policy of QE for the foreseeable future, we think that there is more room for the zloty to strengthen against the euro. We now see EUR/PLN at 3.9 at the end of the year (was 4.05).

But more negative on the Turkish lira

USD/TRY has recorded new all-time highs, reflecting a sharp deterioration in investor sentiment towards Turkey. Despite the the  lira’s sell-off, it is likely that the currency will weaken even further in the months ahead. We have adjusted our USD/TRY upwards to reflect the weaker lira. Our new forecasts for USD/TRY are 2.80 for the end of June and then 2.85 for the Q3 2015 until Q4 2016 (see our FX Watch: Turkish lira weakness not over yet).

150524 - EM FX Weekly