Emerging markets stabilise
(Arnaud Masset, market analyst)
After suffering a massive sell-off, which was triggered by a hawkish shift in the Fed rate path projections, emerging market currencies recovered somewhat on Friday as the US dollar weakened on a broad basis. Eastern European currencies made the most of the greenback’s weakness with the Russian ruble and Polish zloty rising 0.28% and 0.30% respectively. The Turkish lira also got some relief after tumbling as much as 2% amid the terror bombing attack in Istanbul last weekend. South American currencies had a mixed session on Thursday with the Colombian and Chilean peso tumbling 1.30% and 1.55% respectively. The Mexican peso was trading flat this morning while the Brazilian real closed in positive territory, up 0.20%, with USD/BRL easing to 3.3651.
The Brazilian real, just like most EM currencies, has been insensitive to local developments as investors were focused exclusively on the US dollar and the recent FOMC meeting. Even the Brazilian senate’s approval of a constitutional amendment aiming at limiting growth in public spending went unnoticed. The upper house voted 65 to 14 for PEC 55 (previously PEC 241) in spite of massive street protests as it is widely seen as another hard blow for the poor. The un-elected president who entered into office due to Dilma Rousseff’s impeachment last August is facing growing discontent as he continues to push reforms that would never been accepted under Rousseff’s government. In spite of these new austerity measures that would help the country climb out of recession, the uncertainty stemming from elevated political risk is keeping international investors on the back foot which is weighing on the real and Brazilian assets in general.
Even though we believe that the USD overshoot remains the main threat as we enter 2017, the current political uncertainty may prevent a rapid recovery in the real. Moreover, the unpredictability of the upcoming US government is prompting investors to stay invested in USD.
Russia set to surprise markets
(Yann Quelenn, market analyst)
This morning the Central Bank of Russia will release its key rate and markets expect it to remain unchanged at 10%. In our view, we expect the CBR to cut rates by 50 basis points to 9.5% due to several recent signs of improvement in Russia. The first of these is inflation, which has dropped to 5.7% from 6.1% since the end of September. The CBR still expects to reach 4% by the end of 2017, which means that Russian policymakers are likely to start a new easing cycle.
Russia is still struggling with an economic growth of -0.8% yield-to-date. Nevertheless, since oil prices recently largely appreciated, the economy may have expanded on an annualized basis which would also support a normalization path of interest rates.
Moreover, currency conditions are ideal at the moment. The ruble has strengthened strongly against the US dollar and is now trading at less than 62 ruble for a single dollar note - making it easier for the CBR to react. We therefore believe that today’s decision should weaken the ruble.