Group Economics
EM FX Weekly
Macro & Financial Markets Research Georgette Boele tel,+31 20 6297789
We downgrade real and rand
10 September 2015
The environment for emerging market currencies remains very negative We have identified the 6 emerging markets at risk We expect more weakness in the real, rand, lira and rupiah ahead.
Top 6 emerging markets at risk…
Moody’s and Fitch still see Brazil as investment grade. The
The environment for emerging market currencies remains very
outlook of S&P is negative. All the negative factors are coming
negative. There has been a negative feedback loop between
together for Brazil. Brazil is a major commodity exporter with
lower commodity prices, concerns about the global growth
substantial exposure to China. In addition, it is in political
outlook, deterioration in investor sentiment, weak domestic
turmoil, the fiscal situation is deteriorating, the economy is in
growth and political challenges. In addition, the Fed is
recession and the central bank is reluctant to ease monetary
expected to start its hiking cycle this year. We judge that
policy to support the economy because of inflation (the weaker
Brazil, South Africa, Turkey, Colombia, Malaysia and
real is further increasing inflation pressures). S&P’s decision
Indonesia are the most vulnerable (see our Macro Focus: The
will weigh further on the real. We expect more downside in the
top 6 emerging markets at risk. The currencies are among the
real this year versus the US dollar. Therefore we have
weakest performers this year (see graph below). Our forecasts
adjusted our year-end forecast for USD/BRL to 4.0 from 3.7.
for the Turkish lira, and Indonesia rupiah already reflect further downside. We decided to adjust our forecasts for the Brazilian
…and a weaker South African rand in the near term
real and the South African rand downwards.
The central bank in South Africa (SARB) is in a catch-22. On the one hand, the economy is weak, while on the other hand a
Real treated like a pariah
weaker rand is resulting in upward pressure to inflation. In
Performance in %
addition, there are strikes in the mining sector and power BRL COP TRY MYR ZAR IDR MXN CLP RUB THB KRW PEN HUF SGD PLN INR CZK PHP CNH CNY TWD
-45
-40
-35
-30
-25
-20
year-to-date
-15
-10
-5
0
5
5-days
Source: Bloomberg
The Brazilian real is treated like a pariah… The Brazilian real is the weakest emerging market currency in our coverage so far this year declining by more than 40% versus the US dollar. The central bank has halted its hiking cycle and has intervened in currency markets to stem the fall of the real. This week the situation got worse. S&P lowered its long-term foreign currency credit rating for Brazil to BB+ from BBB-. So Brazil falls out of the investment grade category.
blackouts that hamper the economy. With the Fed expected to start hiking this year, the rand will most likely remain under pressure mainly because of weak fundamentals. Therefore, we lowered our ZAR forecasts further. Our new year-end forecast for USD/ZAR is 14.0 (from 13.5). As is the case for many emerging market currencies, the South African rand is substantially undervalued. So if sentiment on emerging markets eventually improves it is likely that it will rally strongly.
ABN AMRO emerging market currency forecasts USD/CNY (onshore) USD/CNH (offshore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR USD/RUB USD/TRY USD/ZAR EUR/PLN EUR/CZK EUR/HUF USD/BRL USD/MXN USD/CLP
10-Sep 6.38 6.40 66.5 1,194 1.40 36.10 32.50 14,333 68 3.04 13.82 4.22 27.50 314 3.78 16.89 689
Q3 2015 Q4 2015 6.50 6.55 6.55 6.55 66 66 1,200 1,240 1.43 1.46 36.00 36.40 32.80 33.40 14,000 14,300 65 60 3.00 3.10 13.90 14.00 4.20 4.15 27.50 27.50 315 315 3.90 4.00 17.00 17.00 690 700
Source: ABN AMRO Group Economics
Q1 2016 6.60 6.60 67 1,250 1.47 36.60 33.50 14,400 60 3.05 13.80 4.10 27.40 315 3.90 16.75 690
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 14,600 55 3.00 13.60 4.05 27.25 310 3.85 16.50 680
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 14,800 55 2.95 13.40 4.00 27.00 310 3.80 16.25 670
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,000 55 2.90 13.20 4.00 26.75 310 3.75 16.00 660
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EM FX Weekly - We downgrade real and rand
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