EM FX Weekly – Stronger dollar weighs on EM FX

by: Georgette Boele , Roy Teo , Peter de Bruin

  • Stronger dollar weighed on EM currencies
  • Weak Polish data hurt on zloty, while Turkish lira strengthens due to ongoing ‘stealth’ tightening
  • Some adjustment in Asian FX forecasts


Recovery of the US dollar hurt EM currencies

Emerging market currencies generally moved lower as the 10y US Treasury yield and the US dollar moved higher. Central and Eastern European currencies were among the weakest currencies, while the Chinese yuan was the most resilient.


Weak Polish data weigh on the zloty

From the start of 2015 until 21 April, the Polish zloty had a strong run versus the euro. A weak euro, strong economic data and the message by the central bank that it will unlikely cut interest rates despite negative year-on-year consumer inflation, gave strong support to the zloty. However, since 21 April the positive sentiment eased somewhat. The recovery in the euro, weaker Polish economic data were the main reasons for this. For example a sharp drop in retail sales pushed EUR/PLN towards 4.10. We expect this move to be temporary and the zloty to rally again going forward because of the strong economy and monetary policy divergence.


CBRT keeps stealth tightening in place,…

On Wednesday, the Turkish central bank (CBRT) left its policy rates unchanged. Being under political pressure, the CBRT has refrained from hiking any of its rates to combat inflation lately. Still, it has implemented a policy of ‘stealth’ tightening. It has pushed the interbank rate to the upper bound of its interest rate corridor, by increasing the amount of bank funding through its more expensive ON-lending facility.


…helping the lira to recovery further

The decision helped the Turkish lira to recover further. A stabilisation of the oil price, weakness in the US dollar, and an increasing recognition by investors that monetary conditions are relatively tight were the most important reasons for this. In addition, polls are suggesting that the ruling AKP will not secure enough seats to change the constitution in the upcoming elections, which could further jeopardise the central bank’s independence. Still, we expect to see a renewed bout of lira weakness when the Fed starts its tightening cycle.


Some adjustments in Asia FX forecasts

We are now more bearish on both the Indonesian rupiah and Indian rupee. Although S&P recently raised Indonesia’s credit rating from stable to positive, we remain concerned about its growth and inflation dynamics. Headwinds for the region are rising with an El Nino event expected to happen this year. This should provide less flexibility for the Reserve Bank of India to lower interest rates. On the other hand, we are less bearish on the Chinese yuan as the authorities have implemented targeted fiscal and monetary stimulus to stimulate economic growth, with a weaker exchange rate as a less preferred option currently. A more resilient yuan will have positive spillover effects on the Taiwan dollar given its sensitivity to the yuan.