EM FX Weekly – EM FX extends recovery

by: Roy Teo , Georgette Boele

EM-FX-weekly-17-April-2015.pdf ()
  • EM currencies profited from a weak US dollar with the exception of the Turkish lira
  • Asian currency performance has a direct impact on central bank behaviour
  • Weaker CNY needed?

EM currencies benefit from a weak US dollar…

US economic data were generally weak and this weighed on the US dollar in the past week. Emerging market currencies benefited as market expectations of a slower pace of rate hikes in the US increased. In our view, the recovery in emerging market currencies may not be sustainable as we expect the US economy to rebound strongly in the coming quarters. More importantly, financial markets are under-estimating the pace of rate hikes in the US in our view. The Russian ruble recovered for the fifth consecutive week. It reached the strongest level this year as investor sentiment towards Russia improved further. This was supported by stronger than expected economic data and firmer oil prices.

150417 EM FX 1

 …with the exception of the Turkish lira

On the other hand, the Turkish lira underperformed due to political uncertainty and weak fundamentals. Market speculation that the central bank may tighten monetary policy next week to support the currency has increased. Indeed, recently, the central bank has pushed the one-week interbank rate to upper bound of its interest rate corridor. We expect the interest rate corridor to remain unchanged at next week’s meeting.

Mixed signals from Asian officials

Asian currency performance this year has had a direct impact on central bank behaviour. On the one hand, the Bank of Thailand (BoT) and the Reserve Bank of India (RBI) have cut interest rates to counterbalance the impact of the strong Thai baht and Indian rupee on their exports. It is likely that they will continue to ease monetary policy further in the form of rate cuts or FX interventions (RBI). On the other hand, the central banks of Singapore (MAS) and Indonesia (BI) have been less dovish, because of weakness in the Singapore dollar and Indonesia rupiah.

Weaker CNY needed?

Chinese exports contracted by 15% y-o-y in March, the weakest reading since February 2014. We think this is a combination of a weak and uneven global recovery in recent months and a strong yuan. More than half of China’s exporters expect a trade slowdown according to a recent Reuters survey. Furthermore, pressure on margins is increasing, with production costs expected to rise by more than 6% and orders by about only 3% this year. The strong yuan is also putting downward pressure on inflation which is less than half the target rate. However Premier Li stated that China cannot rely on a weaker currency to boost exports and does not want further devaluation. On balance, we think that China will not allow a sharp and disorderly depreciation of the currency but will tolerate a gradual decline in the yuan.

150417 EM FX 2