EM FX Weekly – Mixed performance

by: Roy Teo , Georgette Boele , Peter de Bruin

  • Asian currencies fail to profit from dollar weakness
  • Monetary policy in Eastern Europe remains supportive


Mixed performance

In general, emerging market currencies showed a mixed performance despite the weak US dollar. Asian currencies were generally weak, while Eastern European currencies and currencies of commodity exporting countries performed relatively well. The latter is mainly the result of higher commodity prices.


Asian FX lower: driven by weaker domestic sentiment

Despite weak investor sentiment towards the US dollar in the past week, most Asian currencies did not fare well due to weaker domestic data. The South Korean won (KRW) declined by more than 1% as the manufacturing sector contracted at the fastest pace since October 2014. We also suspect that the central bank was in the market to weaken the won due to increasing concerns that the weak Japanese yen would adversely impact South Korea’s exports. The Indonesian rupiah (IDR) also underperformed as economic growth in the first quarter expanded at the slowest pace since the third quarter of 2009. With inflation still above the central bank’s target, the unfavourable growth and inflation dynamics were negative for the IDR. The Indian rupee (INR) was also not spared due to slower growth outlook and concerns that firmer oil prices will widen the trade deficit.


Polish Central Bank keeps rates on hold at ultra-low levels

Following last week’s aggressive rate cut by the Russian central bank, this week, the central bank of Poland left its reference rate on hold, at 1.5%, as was widely expected. The NBP had reduced its key rate earlier this year in response to the fall in oil prices. However, in its statement it stressed that rates are likely to remain on hold for the foreseeable future. Indeed, an ‘expected gradual acceleration’ of growth, helped by a ‘recovery’ in the eurozone and a ‘good situation’ in the domestic labour market were all expected to reduce the risk of inflation remaining below the target in the medium term. We think that we have to wait for the first rate hike at least until the second half of 2016.


…while the Czech central bank will continue to use the koruna as policy instrument

Meanwhile, the Czech central bank, which has already brought its policy rate to a technical zero, reiterated its intention to use the koruna exchange rate as an additional instrument to ease monetary policy conditions. As such, the koruna is kept close to CZK 27 to the euro. In addition, the central bank stressed that it remains ready to move the exchange rare to an even weaker level if deflationary risks were to materialize. We think that such a move will not be necessary. The Czech economy, as the Polish economy, will benefit from the upswing in the eurozone, its main trading partner, and an improvement in its labour market. This should underpin growth and help inflation to eventually pick up again.