EM FX Weekly – EM FX referendum scenarios

by: Roy Teo , Georgette Boele , Peter de Bruin

EM-FX-weekly-2-July-2015.pdf (145 KB)
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  • Weak EM FX on strong US dollar, higher US Treasury yields and the Greek saga
  • Greek YES-vote should support currencies with strong fundamentals
  • Greek NO-vote would result in a sharp deterioration in sentiment and hurt FX with weak fundamentals
  • A Grexit will have limited negative impact on CE3
  • ABN AMRO: most accurate overall forecaster for Asian currencies for 4 consecutive quarters

Strong US dollar, higher US yields and Greek saga

This week emerging market currencies have been weak. The stronger US dollar and higher US Treasury yields pushed them lower. Moreover, the Greek saga also weighed on currencies, especially currencies from Central and Eastern Europe. In case of a Greek NO-vote, currencies with weak fundamentals such as the Turkish lira, South African rand, Brazilian real and Indonesian rupiah would suffer because of a sharp deterioration in investor sentiment. A YES-vote (our expectation) will likely improve investor sentiment and should support currencies of countries with strong fundamentals such as currencies of Central Europe.

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CEEMA FX in case of a Grexit

Although Bulgarian, Romanian and Serbian banks’ have large exposures to Greece, this is not the case for the countries in central Europa. Banking exposure to Greece of Polish, Hungarian and Czech banks is negligible. Russia also has hardly any exposure to Greece, though Turkish banks have an exposure of around 4% of Turkish GDP. In terms of trade, CE-3 countries are shielded from a downturn in Greece, with trade exposures to the country generally being less than 1% of total trade. Poland, Hungary and the Czech Republic would only face an indirect exposure, if a Grexit were to lead to a significant downturn in the eurozone, which is not our base scenario. A Grexit would also, in our view, reduce the chance that these countries would eventually enter the euro.

Asian currencies more resilient

Asian currencies have been more resilient compared to other emerging market currencies due to better economic fundamentals and smaller economic exposure to Greece. In addition, Asian central banks have built up larger foreign currency reserves since the Fed tapering dry run in the middle of 2013. Nevertheless in the event of Greece referendum NO-vote on 5 July, we expect the Indonesian rupiah to be the worst performer among Asian currencies given the relatively weak growth inflation dynamics and current account deficit. On the other hand, we expect the Chinese yuan to be the most resilient given that the exchange rate regime is less open and the central bank has large foreign currency reserves to limit volatility in the yuan.

ABN AMRO: most accurate overall forecaster for Asian currencies for 4 consecutive quarters

We are proud to highlight that in the recent quarterly Bloomberg FX ranking, ABN AMRO was ranked the most accurate overall forecaster for Asian currencies for four consecutive quarters from 2014 Q3 to 2015 Q2.