EM FX Weekly – EM FX lower

by: Roy Teo , Georgette Boele

EM-FX-weekly-23-July-2015.pdf (145 KB)
  • EM FX  under pressure…
  • …with some exceptions
  • Downside risk to THB and KRW forecasts

EM FX under pressure…

Emerging market currencies have in general been under pressure since 9 July. A higher US dollar, a rise in 10y US Treasury yields and expectations that the Fed will start hiking rates this year weighed on EM FX. The Turkish lira was the weakest performing currency due to security concerns after the attack in Suruc on Monday. The Chilean peso, Mexican peso and Russian ruble fell because of weakness in oil and base metal prices. In the case of the Brazilian real, the political scandals and commodity price weakness weighed on the currency. Going forward, we expect the start of the Fed rate hike cycle to weigh on EM FX, especially currencies with weaker fundamentals such as the Turkish lira and the Brazilian real.

…with some exceptions

However, some currencies have been able to outperform the US dollar. The Hungarian forint outperformed EM FX this week, as the central bank unexpectedly signalled that its easing cycle is finished. Moreover, the Czech Koruna profited from expectations that the central bank may be forced to abandon the floor in EUR/CZK due to a strengthening economy at some point in time.

Downside risks to THB and KRW forecasts

The South Korean won (KRW) has declined faster than expected in recent weeks and has reached our year-end target. This was triggered by several developments. The Middle Eastern Respiratory Syndrome outbreak since May has dampened domestic consumption significantly. As a result, the Bank of Korea has lowered this year’s economic growth forecast from 3.1% to 2.8% earlier this month. The Finance Ministry has also announced some measures to recycle some of the current account surplus. Given the uneven global recovery and strong won, exports have remained weak since the beginning of this year. Though the won real effective exchange rate has declined in the past month, it is still 2% stronger since the start of this year. Hence, we judge that the central bank will be more tolerant of a weaker exchange rate, which will fuel speculators to use the won as a funding currency.

We also see downside risks to our Thai baht (THB) forecasts. The recent drought impact on agriculture is likely to impact domestic consumption, with economic growth lower by as much as 0.5pp, according to the central bank’s estimate. The 50bp rate cut earlier this year has also failed to stem the decline in consumer confidence which is at its lowest level since May of last year. In addition, exports have also underperformed the government’s target and inflationary pressures remain subdued. We are currently reviewing both our USD/KRW and USD/THB forecasts.

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