Our strategy team at Citi has been bearish on EM fixed income and FX for many quarters, on the back of the reversal of international capital that was triggered by a G3 attempt at decoupling from EM growth.
In 2013, the markets recognised the risk of growth divergence between the G3 (the US being the major driver, of course) and EMs. That led the US dollar into a 22 per cent appreciation on a trade-weighted basis from April 2013 to the end of 2015, and a marked deceleration in EM portfolio flows (most recently an estimated outflow of $240bn in 2015). Read more
The global commodities rout from mid-2014 brought with it severe market volatility that reshaped the growth trajectories of most economies, especially commodity-dependent economies such as those in sub-Saharan Africa. Countries such as Zambia, Angola, Nigeria and Ghana have experienced the effects of this first hand.
In periods of heightened volatility, the response mechanism of central banks becomes a vital factor that either compounds or abates the problem. This point is exemplified by how the various central banks across sub-Saharan Africa have dealt with rapidly weakening currencies and the subsequent rise in inflation. The policy response adopted by central banks in Zambia and Ghana, for instance, has erred on the side of minimum direct intervention in currency markets. In contrast, Nigeria and Angola have applied a heavy hand in defending their currencies. The two approaches have resulted in the formation of two types of risks: volatility and ‘jump’ risk. Read more
Brazil is undergoing its most severe recession in decades, with GDP expected to contract more than 3 per cent this year. Policy adjustments and the fallout from the Petrobras corruption scandal have eroded confidence and resulted in a collapse of investment, while the deterioration of fiscal accounts in the last few years has cost the country its investment grade rating. Not surprisingly, the Brazilian real has depreciated dramatically over the past year, losing about half of its value against the US dollar.
However, amid all the gloom, the depreciation of the real also provides a silver lining, as it is supporting the recovery of the trade balance and stimulating growth through increased net exports. Much of this positive effect has so far been overshadowed by weak commodity prices. However, when looking at quantities, an adjustment is clearly under way which should help Brazil restore its external balance. Read more
It sometimes feels that nothing is as volatile or confusing as exchange rates. This sensation has, of course, been exacerbated by the extraordinary monetary policies pursued over the past seven years. The world’s four largest central banks have expanded their balance sheets by an approximate $8tn since the global financial crisis. That is more than the combined GDP of Germany, France and Italy.
The conventional wisdom is that monetary stimulus is good for financial asset growth and, indirectly, for economic growth, while it has a negative impact on currencies as the increased money supply leads to capital outflows as interest rates are pushed lower. Well, that may still be true in the short term but it is difficult to square it with the medium term development. Read more
A few weeks ago I wrote a piece for beyondbrics about what milk can tell us about the fair valuation of African currencies. While the methodology has its drawbacks, it is a basis for debating where African currencies should be relative to where they are today. The chart below shows the year-to-date performance of selected currencies against their over/undervaluation based on the price of a gallon of milk.
- Sources: S&P Capital IQ, Atria Africa Research
Brazil’s economy – as beyondbrics readers know – is in serious trouble, and the unorthodox policies of the country’s embattled president, Dilma Rousseff, have been major contributors to the Brazilian real’s sharp depreciation. But as an analyst who has a long-held negative view on the Brazilian real, it is interesting to ask – at this moment – whether we might be missing something now that investor sentiment has caught up with our bearish stance on the currency.
In short, given the real’s steep drop since 2011, has Brazil’s currency hit a bottom? Read more
In the last six to eight months, most emerging and frontier currencies have weakened against the US dollar. One explanation is the likelihood of the US Federal Reserve raising rates at its September policy meeting, making US assets comparatively attractive. Meanwhile, the possibility of a ‘Grexit’ is exacerbating the need for investors to buy safe haven assets, of which dollar assets are among the most sought after.
However, some EM currencies have bucked this trend. The Malawian kwacha is one. Indeed, it is the only African currency to have strengthened this year, as shown in the bar chart below: Read more
What’s the one good thing about Mexico’s consumer confidence being poor? It should help prevent the country’s weakening peso from fuelling inflation.
All eyes are on the peso at the moment, after monetary authorities launched a new intervention programme on Wednesday to try to calm volatility and ensure liquidity as the dollar goes from strength to strength. Read more
Turkish lira per US dollar, 3 months to Feb 4. Source: Thomson Reuters
The Turkish lira went on a fresh slide on Wednesday, adding to its losses over the past fortnight. Investors have no doubt been alarmed by the pressure piling on Turkey’s central bank from the luscious new presidential palace in Ankara. But the lira’s new weakness may also signal an unwinding of some strongly bullish positions on Turkish local debt taken by foreign investors in recent months. Read more
It’s been a few years since the guns of the international currency wars fell silent, or at least until the main combatants turned most of their attention to other things.
With the strength of the dollar, however, the issue might easily re-emerge. If it does, even if the eurozone and Japan are the main initial targets, emerging markets are unlikely to be able to sit out a renewed burst of hostilities. Read more
The gloom continues to darken over the outlook for Brazil’s economy this year but, for the time being, investors are betting that the country’s very high interest rates are worth the risk.
The central bank’s latest weekly survey of market economists shows the consensus on economic growth this year falling yet again, to just 0.38 per cent. Inflation expectations, meanwhile, have crept up again, to 6.67 per cent, beyond the upper limit of the government’s target range. Read more
TRY per USD, week to Jan 16. Source: Thomson Reuters
Turkey’s President Recep Tayyip Erdogan has got embroiled in interest rates again – and the country’s currency immediately felt the impact.
Erdogan’s allergy to high interest rates is well known, as is his insistence that there is something out there called “the interest rate lobby” that drives rates up in a bid to enfeeble the Turkish economy. But all the same he was in fine form in a speech on Friday. Read more
This is what happened to the Hungarian forint and the Polish zloty, measured against the euro, after the Swiss central bank abandoned its currency peg on Thursday.
Source: Thomson Reuters
As Brazil’s outgoing finance minister, Guido Mantega, bids “tchau” to his former job , he has at least one thing to feel good about.
While the economy is a shadow of what it was when he took office eight years ago, he does seem to have succeeded in at least one major policy – his campaign to weaken Brazil’s currency, the real.
The man who is credited with making the term “currency war” his own seems to have won his battle to weaken the Brazil’s currency in the face of a tide of foreign speculative hot money. Read more
In the long-running battle between contagion and differentiation in emerging markets, contagion currently has the upper hand. That’s hardly surprising when you look at the size of the shock coming out of Russia and the failure of Monday night’s 650 basis point interest rate rise to deal with it. Nothing on this scale has been seen since 1998.
Rouble per US dollar, year to date. Source: Thomson Reuters
But contagion is not absolute and some EM currencies are bucking this month’s sharp falls, at least for now. Below, we present charts that show how the big EM currencies are faring in these times of extreme stress. Read more
Russia’s 10-year bond yield has climbed for the 10th consecutive day to a new five-year high of 12.4 per cent as investors continue to exit the country’s financial markets, fast FT reports.
The rouble regained its footing somewhat last week, but only thanks to central bank intervention. It is today once again the world’s worst performing major currency, falling 1.4 per cent to 53.62 per US dollar (see chart below). Read more
Beyondbrics recently warned that spiralling interest payments on hard currency bonds might yet cause EM corporates a big headache. The pain may be drawing closer: the recent slide of Asian currencies against the dollar looks even worse when you strip out the renminbi, which is holding its own, and the Japanese yen.
Source: Record Currency Management
There could be a serious knock-on effect on domestic banks if firms are forced to loot cash deposits to meet debt repayments. Read more
Source: Thomson Reuters
Nigeria’s central bank on Friday tried to drawn a line under the naira – but the market continues to increasingly bet on a devaluation after the elections set for early 2015. Read more
Source: Thomson Reuters
The Russian rouble dived deeper to new lows on Friday, as the central bank’s decision on Wednesday to let the currency float failed spectacularly to put a floor under the exchange rate. It went briefly through Rbs48 to the dollar during the morning before recovering slightly, down from a low of Rbs45 to the dollar on Wednesday.
“People are in disbelief. The rouble is being smashed again,” said Timothy Ash of Standard Bank. “The central bank is nowhere.” Read more
As the rouble continues its decline – hitting a new low against the dollar and euro this week – it is Russian consumers who will feel the sharpest pain, says Capital Economics, thanks to increasing inflation, which had already risen in September to its fastest pace in three years. Read more