EM Big Picture: What has Changed

My colleagues on the emerging markets team at Brown Brothers Harriman--Win Thin, Ilan Solot and Masashi Murata provide this useful update on notable developments. 

1) Tightening in Brazil will likely be more gradual

2) Czech still in verbal intervention mode, despite large CZK losses

3) The one-way THB appreciation trend may be coming to an end soon

4) Philippines is preparing more measures to discourage speculative foreign investments

5) Fresh cross winds for Korea asset prices are negative on net

1) Tightening in Brazil will likely be more gradual

Dovish minutes and new tax measures mean that hikes in Brazil will be more gradual. We still think that the most logical strategy would be to frontload hikes and try to hike the least possible, but that doesn’t look like the strategy being pursued. The central government has decided to take a greater responsibility for containing inflation and is expected to announce new tax cuts on May 1 (fuel, public transportation and payroll taxes). The cost, of course, will show up on the fiscal side – but why worry about such unpleasant thoughts? Aside from improving inflation expectations in the near term, the measures will also help support President Dilma’s still very high popularity into the 2014 elections. As usual, we will wait until closer to the April COPOM meeting before committing to a view on rates, but a more gradual approach now seem more likely now.

2) Czech still in verbal intervention mode, despite large CZK losses

Czech central bank Governor Singer has not relaxed his interventionist rhetoric, which may come as a surprise given the extent of CZK depreciation this year. He is prepared to vote for currency interventions if “undershooting the price stability mandate” becomes a concern. Singer will reportedly make up his mind about inflation risks next week before monetary policy decision. As it is, EUR/CZK is making new highs for this move and so the market is doing the heavy lifting for the CNB.

3) The one-way THB appreciation trend may be coming to an end soon

Thai policymakers seem to be signalling that the USD/THB 27.00 is the level to watch. This level is still far away, but rhetoric is getting stronger and there are some signs that verbal intervention is creating some two-way risk for the THB. The Ministry of Finance has been criticizing the BOT for not doing enough to slow down the baht gains. And more recently, the BOT governor commented that the baht gains were “excessive.” The USD/THB pair bounced higher from a 16-year low yesterday of 29.20. The good news is that both sides are rejecting any harsh measures such as capital controls. We think the days of THB regional outperformance are coming to an end soon, though further gains are certainly possible within the context of a generalized EM rally.

4) Philippines is preparing more measures to discourage speculative foreign investments

Comments by Assistant Governor Amador suggest that officials are nearly ready to implement a ban on foreign fund deposits in the central bank’s reverse repo facility, though it is still not clear whether they would choose to implement it. The deciding factor will probably be the speed of PHP appreciation. The measures would be very much in line with the interventionist style of the bank: gradual and focused on regulatory measures, such as limits for foreign investment in the Special Deposit Accounts and use of NDFs. We still think that the fundamentals are very favourable for further PHP appreciation, and that these measures will not be enough to alter the strengthening trend. However, like the THB, we expect them to be enough to slow down gains.

5) Fresh cross winds for Korea asset prices are negative on net

A possible cyber attack on South Korean banks and broadcasters sparked new geopolitical concerns. On top of this, rhetoric from the Finance Ministry on capital controls remains strong, with policymakers reportedly considering “various” financial taxes to control inflows. We think this has a dual purpose of financial stability and competitiveness (i.e. JPY). On the positive side, however, there is more talk of a supplementary budget worth KRW10 trln. Fresh spending will probably reduce the onus on the BOK to ease policy further, though we still think further easing is possible this year. We remain bearish on KRW, especially relative to other EM Asian currencies, but we are surprised that equity markets have fared so poorly. In the past, geopolitical tensions have proven to be good buying opportunities. At this point, we still expect this one to be the same – but we are rapidly losing hope.