Macro Weekly – EM crisis or wobble?

by: Han de Jong , Nick Kounis , Georgette Boele , Roy Teo

Macro Weekly - 3 February 2014 - EM crisis or wobble? ()
  • Big Picture: A number of factors have undermined emerging market sentiment. In most cases, the causes are purely domestic. More serious are concerns over insufficient reform, unsustainable growth models and financial stability in China. In addition, credit growth in many countries has been strong in recent years. However, the quality of economic management in these economies has improved and many have large currency reserves, providing them with a significant defence force. They are also more flexible than in the past as they generally do not follow fixed-exchange rate policies and many of them actually are running surpluses in international trade. The upturn in advanced economies we are expecting will also be a support.
  • Rates: Declining inflation and tightening money market conditions suggest that the ECB will take action to ease monetary policy, possibly as soon as this week’s meeting. We think that the ECB’s most likely first step will be to provide liquidity to the system by stopping the sterilisation of the SMP. If this fails to have traction on financial conditions, then we think that the ECB would most likely cut rates further, with the deposit rate moving into negative territory in March or April.
  • FX: Although some emerging market currencies were supported by central bank actions, general sentiment remained weak. Safe haven currencies such as the Japanese yen, the Swiss franc and to a lesser extent the US dollar received support. We think positive fundamentals mean that the risk of contagion is relatively low and hence expect sentiment to improve. The pressure on EUR/USD is building on the back of ECB easing expectations and as a result the pair moved to below 1.35. We expect the downward trend to continue.