Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) Brazil's central bank is not tapering its FX intervention plan

2) The Philippine central bank outlined the tools it will use to counter Fed tapering

3) The RBI is taking further steps to improve the liquidity situation and help stabilized capital markets

4) There were some notable trade data surprises out of Asia

5) Israel central bank delivered a dovish surprise rate cut

1) Brazil's central bank is not tapering its FX intervention plan. Central bank president Tombini assured markets that the $60 bln intervention plan is not about to change. Given the positive performance of the BRL and the Bovespa, many had started to speculate that officials would soon start to get concerned again about excessive currency strength, especially after USD/BRL broke below the 2.20 level. The real should continue to trade on the strong side for now, but we would soon start to look for opportunities to take the other side, especially against the Mexican peso.

2) The Philippine central bank outlined the tools it will use to counter Fed tapering. The bank is sounding very confident about its ability to deal with further volatility in the PHP – and we mostly agree, at least compared with many other EM countries. According to Deputy Governor Guinigundo, “We can ride out any turbulence, as we have policy tools in our hand that we can deploy anytime.” He also said the measures include boosting dollar and peso liquidity, careful surveillance of risk, use of forward guidance, tapping currency swap agreements, and possible tightening of monetary policy.

3) The RBI is taking further steps to improve the liquidity situation and help stabilized capital markets. This week, it cut the minimum maturity for FX borrowing through its swap facility to one year from three years. Recall that a few weeks ago, the RBI allowed commercial lenders to double their overseas borrowing. As we have noted, there is a lot going on that could affect India’s fixed income markets, most of which suggest further support for the back end of the curve. Last Friday, the RBI delivered a surprise rate hike. Then the government’s second-half borrowing schedule came in supportive of further cuts to the budget deficit. And of course, onion prices have crashed by 25-30% from the peak of Rs 60 per kg last week after the Maharashtra government threatened onion traders with raids and new harvests eased pressure on supplies. INR has been outperforming more of late and local yields are down around 6 bp across the curve.

4) There were some notable trade data surprises out of Asia. Philippines July imports rose to a 7-month high of 8.7% y/y, much higher than the -0.4% expected and the -4.8% y/y drop in June. The main drivers were demand for raw materials and consumer goods, especially electronics. Imports from the US were the greatest contributor to the surprise. Overall, the data suggests both strong domestic demand and a potential for higher exports given the important role Philippines plays in the electronics production chain for the region. This widened the trade deficit to -$649 mln from -$370 mln in June. In Taiwan, August exports order rose only 0.5% y/y vs. 1.3% expected. Taiwan’s economy remains sluggish and policymakers will have to rely more on fiscal policy and a weaker currency to boost demand. The central bank kept rates steady at 1.875% this week. Thailand’s August trade balance narrowed dramatically to -$95 mln (expected at -$2.1 bln). This was led by a surge in exports to 3.9% y/y vs. -1.5% in July. In addition, imports also fell sharply, -2.1% y/y vs. +1.1% y/y the previous month

5) Israel central bank delivered a dovish surprise 25 bp rate cut to 1.0%. Data have been mixed and most (us included) thought it would be steady as she goes under interim Governor Flug. The bank last cut in May under then-Governor Fischer, so this is the first move under Flug as we wait (and wait) for the next governor to be named. Some in the Knesset are pushing for Netanyahu to name Flug but it is unclear how much traction this would get. We think that is the right move since Fischer originally said Flug was the best choice.