(from my colleagues Dr. Win Thin and Ilan Solot)
In the EM local currency bond space, Indonesia (10-year yield -29 bp), China (-3 bp), and Korea (-2 bp) have outperformed over the last week, while Ukraine (10-year yield +350 bp), Russia (+43 bp), and Brazil (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 2 bp over the past week.
In the EM FX space, RUB (+2.1% vs. USD), ILS (+0.5%), and CLP (+0.4%) have outperformed over the last week, while COP (-2.8% vs. USD), MYR (-1.9%), and KRW (-1.4%) have underperformed.
1) EM saw another dovish surprise with a 25 bp cut by Indonesia’s central bank. The policy rate was lowered to 7.5% vs. unanimous calls for no change my market participants. Recall that Indonesia hike rates last November in an unscheduled meeting. Growth has slowed, but at 5.0% it is still rising at relative solid pace, and despite the benefits of lower energy prices at the pump, inflation is still running at round 7.0% y/y. It seems as if the bank is trying to use the window of opportunity before the Fed starts hiking rates. We see the logic of that, but with the rupiah trading back to levels not seen since the Asian financial crisis in the late 90s and oil prices increasing, the move seems a bit premature to us.
2) Czech President Zeman criticized the central bank's EUR/CZK floor, saying he would appoint only central bankers that are opposed to it. This comes just two weeks after the bank extended its forward guidance to "at least H2 2016" from "at least the start of 2016" previously. Next policy meeting is March 26, and we see no shift in policy then. After Zeman's comments, EUR/CZK fell to 27.20, the lowest since November 2013, when the floor was introduced. The pair has since recouped about half of this week's drop. We think the EUR/CZK floor will remain in place, despite Zeman's opposition. Indeed, it's worth pointing out that the earliest opportunity for a change on the CNB board comes in June 2016, when Governor Singer’s term expires, along with fellow board member Janacek.
3) Nigeria’s central bank ended its regular currency auctions. These central bank auctions were one of the few steady sources of dollars in Nigeria. As we warned after the last time they took measures to limit FX trading, such actions will only make the pressures build, not lessen them. We know there is excess demand for dollars. What will shutting off one of the few sources of supply do? The decision to delay the election is only making matters worse.
4) Banco de Mexico minutes came out, and included new economic forecasts. Expected GDP growth for 2015 was reduced to 2.5-3.5% from 3.0-4.0%, with cuts seen to 2016’s forecast as well. Inflation is seen as closing the year just below 3.0%. Yet the bank reiterated it will be closely watching the next move of the Fed, implying this is a major variable in policymakers reaction function. We think it’s possible that the bank will hike this year, but we are not as convinced as many observers are that this will happen before or together with the Fed.
1) EM saw another dovish surprise with a 25 bp cut by Indonesia’s central bank
2) Czech President Zeman criticized the central bank's EUR/CZK floor, saying he would appoint only central bankers that are opposed to it
3) Nigeria’s central bank ended its regular currency auctions
4) Banco de Mexico minutes came out, and included new economic forecasts
Over the last week, UAE (+1.7%), India (+1.1%), and Hong Kong (+0.7%) have outperformed in the EM equity space as measured by MSCI, while Colombia (-3.5%), Egypt (-2.5%), and Brazil (-1.5%) have underperformed. To put this in better context, MSCI EM fell -0.5% over the past week while MSCI DM rose 0.4%.
2) Czech President Zeman criticized the central bank's EUR/CZK floor, saying he would appoint only central bankers that are opposed to it
3) Nigeria’s central bank ended its regular currency auctions
4) Banco de Mexico minutes came out, and included new economic forecasts
Over the last week, UAE (+1.7%), India (+1.1%), and Hong Kong (+0.7%) have outperformed in the EM equity space as measured by MSCI, while Colombia (-3.5%), Egypt (-2.5%), and Brazil (-1.5%) have underperformed. To put this in better context, MSCI EM fell -0.5% over the past week while MSCI DM rose 0.4%.
In the EM local currency bond space, Indonesia (10-year yield -29 bp), China (-3 bp), and Korea (-2 bp) have outperformed over the last week, while Ukraine (10-year yield +350 bp), Russia (+43 bp), and Brazil (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 2 bp over the past week.
In the EM FX space, RUB (+2.1% vs. USD), ILS (+0.5%), and CLP (+0.4%) have outperformed over the last week, while COP (-2.8% vs. USD), MYR (-1.9%), and KRW (-1.4%) have underperformed.
1) EM saw another dovish surprise with a 25 bp cut by Indonesia’s central bank. The policy rate was lowered to 7.5% vs. unanimous calls for no change my market participants. Recall that Indonesia hike rates last November in an unscheduled meeting. Growth has slowed, but at 5.0% it is still rising at relative solid pace, and despite the benefits of lower energy prices at the pump, inflation is still running at round 7.0% y/y. It seems as if the bank is trying to use the window of opportunity before the Fed starts hiking rates. We see the logic of that, but with the rupiah trading back to levels not seen since the Asian financial crisis in the late 90s and oil prices increasing, the move seems a bit premature to us.
2) Czech President Zeman criticized the central bank's EUR/CZK floor, saying he would appoint only central bankers that are opposed to it. This comes just two weeks after the bank extended its forward guidance to "at least H2 2016" from "at least the start of 2016" previously. Next policy meeting is March 26, and we see no shift in policy then. After Zeman's comments, EUR/CZK fell to 27.20, the lowest since November 2013, when the floor was introduced. The pair has since recouped about half of this week's drop. We think the EUR/CZK floor will remain in place, despite Zeman's opposition. Indeed, it's worth pointing out that the earliest opportunity for a change on the CNB board comes in June 2016, when Governor Singer’s term expires, along with fellow board member Janacek.
3) Nigeria’s central bank ended its regular currency auctions. These central bank auctions were one of the few steady sources of dollars in Nigeria. As we warned after the last time they took measures to limit FX trading, such actions will only make the pressures build, not lessen them. We know there is excess demand for dollars. What will shutting off one of the few sources of supply do? The decision to delay the election is only making matters worse.
4) Banco de Mexico minutes came out, and included new economic forecasts. Expected GDP growth for 2015 was reduced to 2.5-3.5% from 3.0-4.0%, with cuts seen to 2016’s forecast as well. Inflation is seen as closing the year just below 3.0%. Yet the bank reiterated it will be closely watching the next move of the Fed, implying this is a major variable in policymakers reaction function. We think it’s possible that the bank will hike this year, but we are not as convinced as many observers are that this will happen before or together with the Fed.
Emerging Markets: What has Changed
Reviewed by Marc Chandler
on
February 20, 2015
Rating:
Reviewed by Marc Chandler
on
February 20, 2015
Rating:
