Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

• Malaysia appears to have enacted a subtle change in FX policy.
• Turkey cut foreign currency reserve requirements in an effort to increase the supply of foreign exchange.
• Brazil’s central bank suspended the sale of reverse currency swaps and started selling new regular swaps (equivalent to selling USD).
• Colombia reached a new peace agreement with FARC rebels.
• Mexico's central bank hiked cash rates by 50 bp. 

In the EM equity space as measured by MSCI, Brazil (+4.9%), Mexico (+3.6%), and Russia (+2.9%) have outperformed this week, while Peru (-5.1%), Czech Republic (-3.3%), and India (-2.4%) have underperformed.  To put this in better context, MSCI EM fell -0.1% this week while MSCI DM rose 0.3%.

In the EM local currency bond space, the Philippines (10-year yield -50 bp), India (-30 bp), and Ukraine (-28 bp) have outperformed this week, while Malaysia (10-year yield +45 bp), Thailand (+31 bp), and Poland (+31 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 13 bp this week to 2.28%.

In the EM FX space, EGP (+3.7% vs. USD), MXN (+2.6% vs. USD), and RUB (+1.9% vs. USD) have outperformed this week, while TRY (-3.7% vs. USD), COP (-3.2% vs. USD), and MYR (-1.7% vs. USD) have underperformed.

Malaysia appears to have enacted a subtle change in FX policy.  Further clarity is still expected, but at this time it looks like certain types of investors will be facing a new reporting requirement, whereby fixed income-related FX transactions executed in the local market must be accompanied by an official attestation that it is being executed independently and/or does not correspond to offshore NDF FX activity.  

Turkey cut FX reserve requirements in an effort to increase the supply of foreign exchange.  From the central bank’s website:  “The coefficient for the first tranche of the FX facility of Reserve Option Mechanism has been kept unchanged, the second tranche has been decreased by 0.1 point, the other tranches have been decreased by 0.2 points.”  It’s estimated that the changes could boost liquidity in the financial system by around $700 mln.  

Brazil’s central bank suspended the sale of reverse currency swaps and started selling new regular swaps rather than just rolling existing ones.  This signals official concern with recent BRL weakness.  The central bank called an auction of up to 10k new FX swaps, equivalent to selling $500 mln, and maintained its efforts to roll over 20k existing FX swaps.

Colombia reached a new peace agreement with FARC rebels.  This comes six weeks after the previous accord was rejected by voters in a referendum.  Moody’s noted that “Concluding a peace accord removes an element of uncertainty from Colombia’s outlook and should be viewed as credit positive, even after related fiscal costs are taken into account.”   

Mexico hiked the cash rate 50 bp to 5.25% and maintained an tightening bias.  The rate hike was meant to signal the central bank's anti-inflation commitment in the face of the sharp depreciation of the peso.  The peso has fallen 7.2% this month, which is roughly half of this year's decline.  

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