Bye-bye TRYBy Peter Rosenstreich
Turkish Lira is swinging precariously after losing over 21% in 2018 against the USD. Geopolitical and domestic uncertainties, negative real interest rates and heavy USD current accounts have markets yelling for deeper devaluation. Yet, there was thin hope that the Central Bank of Turkey would regain control by raising interest rates. Wrong! President Erdogan said recently that his new executive powers give him the right to drive monetary policy. That killed the CBT’s independence and any hope that TRY selling would stop anytime soon. He went on to say he wants lower interest rates!
This lowers the probability of an interest rate hike. 175 basis points of rate hike are priced in, but with elections coming on 24 June, the possibility of a 0.3-0.4% cut cannot be ruled out. Our base scenario for TRY is further weakness; the long game for Turkey and CBT remains severely negative.
Surprise Brazil holdBy Arnaud Masset
It’s hard to be optimistic about the Brazilian real. The Brazilian central bank held interest rates steady yesterday, against market expectations. They expected that the Banco Central do Brazil would keep easing by cutting the Selic rate 0.25% to 6.25%. The bank maintained at 6.50%, signalling an uncertain outlook, especially for emerging markets.
The real had a rough month so far, losing 10% against the greenback, with USD/BRL hitting 3.6944 (the highest level since 4 April 2016) yesterday. Despite sound inflation of 2.76% annually in April, currency weakness is casting a shadow on the price outlook as Brazil could start to import inflation (through imports). We think BCB will wait for the dust to settle before resuming its easing.
Central Bank of Mexico to maintain rate unchangedBy Vincent-Frédéric Mivelaz
Today Mexico’s central bank is expected to hold its overnight rate at 7.50%, but maintain a hawkish stance. At a 9-year high, Mexico’s key rate’s steep rise in the last two years was amid concerns of swelling inflation and North American Free Trade Agreement (NAFTA) reconsiderations. From 2016, consumer prices rose from 2.61% to 4.55% annually, putting Bank of Mexico’s 3% target far off the mark. On a broader measure, however, inflation eased significantly from 6.80% (year on year) in December 2017 (16 year high) to 4.55% in April, an encouraging trend for the Mexico’s monetary authority that has long struggled to stabilize this. Accordingly, we predict an unchanged rate.
As NAFTA talks seem to be converging to an encouraging outcome, we expect the Mexican peso to regain strength in the near term. Strongly depreciating since mid-April 2018 (+8.25%) and almost flat since the beginning of the year (-0.69%), USD/MXN is currently weakening as a May monetary policy meeting approaches. Currently trading at 19.52, the pair is expected to decline further, heading to 19.50 in the short-term.