Come-back of the US dollar pushes EM FX lower, while weak Chinese data weigh on Asian FX
A new all-time low in the Brazilian real
We have downgraded Indonesia rupiah and focus on SGD weakness and MAS policy
Come-back of the US dollar
The weakness of the US dollar after the FOMC decision was short-lived. Since the meeting, FOMC members have clearly expressed that last week’s outcome was a close call and that a lift-off this year remains likely. This has given a boost to the US dollar across the board and heavily weighed on emerging market currencies. Moreover, weak economic data in China weighed on most Asian currencies in the past week. In our view, financial markets are still under-estimating the magnitude of depreciation in the Chinese yuan by the end of this year.
Rout in Brazilian real
The Brazilian real fell sharply this week; close to 6% and set a new all-time low versus the US dollar. This steep decline further increases inflationary pressures. As a result, the central bank is between a rock (deep recession) and a hard place (inflation) in an environment of political turmoil and risk of further downgrades. The central bank will probably continue to intervene in FX markets to dampen the slide in the real, but this will unlikely be very aggressive. In the near-term, it is likely that weakness in the real will persist. In the current environment USD/BRL may overshoot to 4.5. Meanwhile, CDS spreads of Brazil have risen sharply. They have surpassed the level seen at the height of the global financial crisis, but it is still far away from the 2002 crisis levels.
Downgrade of IDR forecasts
The Indonesian rupiah (IDR) has surpassed our year-end target of 14,300, due to growth and inflation concerns. We recently lowered our 2016 growth forecast from 5.5% to 5%. We expect further weakness in the IDR due to Indonesia’s external imbalance and potential reversal of capital flows (foreign ownership of government bonds of almost 40%). We have classified Indonesia as one of the EMs currently most at risk for events in China and the looming Fed lift-off (see our Macro Focus – the top 6 emerging markets at risk). We have raised our 2015 and 2016 USD/IDR forecasts to 15,000 (from 14,300) and 15,600 (from 15,000) respectively.
SGD weakness with MAS monetary policy in focus
The Singapore dollar is on track to retest this month’s low. Core inflation eased from 0.4% to 0.2% yoy in August, while headline inflation fell deeper into negative territory (-0.8% yoy). Core inflation has been lower than the central bank’s forecast of 0.5-1.5% since April this year. Indeed, we maintain our view that the Monetary Authority of Singapore is likely to downgrade its inflation forecast and shift the current modest appreciation of S$NEER policy to neutral in the next monetary policy meeting in October. A wider trading band to accommodate the recent higher volatility in the currency also cannot be ruled out. Our year end USD/SGD forecast is 1.46.