EM FX Weekly – Refocus on weak fundamentals

by: Roy Teo , Georgette Boele

EM-FX-weekly-22-October-2015.pdf (146 KB)
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Emerging market currencies lose ground, because of a stronger USD, weaker commodity prices…
…as well as a refocus on weak domestic fundamentals and political uncertainty
But Chinese yuan has been resilient given better economic data

 

Emerging market currencies lose ground

Emerging market currencies’ gains seen last week were completely erased this week. A stronger US dollar across the board and lower commodity prices pushed emerging market currencies down. Moreover, investors turned their focus back on domestic fundamentals and political developments. The latter have remained negative for some countries. Next week, the US FOMC decision and US Q3 GDP will be closely watched. A signal by the FOMC that a rate hike is still on for this year and/or a stronger than expected US GDP, will likely put EM FX under further pressure. However, our base case is that the Fed will delay, which should be some relief.

The Brazilian real sharply lower again…

The Brazilian real has lost more than 3% versus the US dollar since the end of last week. Three Brazilian lawyers, including one of the founders of the ruling party, filed a request for impeachment of Dilma Rousseff yesterday. This request is supported by the opposition (PSDB). The initiative refers to the manipulation of the 2014 fiscal accounts and the use of public bank loans to pay for social benefits. Lower House President Cunha received the request and must decide whether he will accept it. In addition, financial markets have questioned the stance by the central bank not to increase rates with inflation rates this high and the real remaining under pressure. We expect the real to remain under pressure in the near-term because the challenges are likely to remain.
EM FX performance
In % with as basis

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Chinese yuan resilient

In the past week, the Chinese yuan was resilient as economic growth in the third quarter was slightly better than market expectations. In addition, there was some speculation that onshore local banks were supporting the yuan earlier this week. Nevertheless, data from the National Bureau of Statistics of China show that intervention in the currency spot and forward market to support the yuan has eased in September as sentiment in the yuan improved. Earlier this week, the US Treasury semi-annual report on exchange rate policies softened their tone on the yuan, increasing the likelihood that they will support the yuan’s inclusion in the SDR basket later this year. The US report stated that the yuan remains below its appropriate medium term valuation, compared to previous statement that the yuan is significantly undervalued. Looking ahead, the market is pricing in that the yuan will decline gradually towards our year end forecast of around 6.40.

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