EM FX Weekly
Group Economics Macro & Financial Markets Research
12 May 2016
Back to reality Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Brazilian real likely to weaken somewhat… …as focus turns back to reality The Polish zloty has been the weakest CEE currency… …because of political and downgrade risks… …while we expect the Hungarian forint to shine
Brazilian political saga Since the start of this year, the Brazilian real has been the top performer among emerging market currencies. The strong recovery in commodity prices and a downward adjustment in US fed rate hike expectations have given strong support to the real. However, political developments have also been among the major drivers behind the rally in the real. Changes in the real during this week show how sensitive the currency is towards political developments. At the start of the week, the new Lower House leader annulled the impeachment vote of 17 April. This resulted in a 4% drop of the real. In contrast, the Leader of the Senate said that the impeachment vote in the Senate would go ahead. Subsequently, his decision and pressure on the new Lower House leader resulted in a reversal of the cancelation of the impeachment vote of 17 April. This morning, the Senate voted to suspend President Dilma Rousseff from office to face an impeachment trial. Vice-president Temer will take over for 180 days. Financial markets have widely anticipated this. The real could move somewhat higher on the outcome but most is already reflected in the real. Therefore, the reality that a change in power will not solve the current economic challenges will likely weigh on investor sentiment towards the real. Unpopular and tough measures are needed to put the economy on the right track. Overall, we expect the real to come under some pressure in the coming weeks. Our yearend forecast for USD/BRL is 3.5.
Divergence in currencies of central and eastern Europe… So far this year, the Polish zloty has weakened more than 4% versus the euro while the Czech koruna has moved sideways and the Hungarian forint has strengthened modestly. There are several reasons for this. S&P’s downgrade of Poland to BBB+ on 15 January 2016 with a negative outlook caused a substantial weakening of the zloty. In addition, the announced measures by the PiS party and fears that the new central bank governor may not be as independent as portrayed further dented investor sentiment towards the zloty.
Insights.abnamro.nl/en
2
EM FX Weekly - Back to reality - 12 1 May 2016 6
On 13 May Moody’s will review Poland’s credit rating. The risks of a negative outlook o or even a downgrade ha ave increased considerably. Financial markkets have antic cipated the risk of a downgrade. However, we think t that this is not fully refleected in the pric ce yet. So in oty could rema ain under press sure. A loomingg downgrade and the the near-term, the zlo uncertainty surround ing politics will likely result in a more modesst recovery tha at we had pencilled in. As a ressult, we have downgraded our zloty forecastts versus the euro. e We a adjusted o our forecasts in EUR/CZK as we w now expect ct that the Czec ch central have also bank will w remove the floor in EUR/C CZK in Q3 2017 7.
…and d the Hungari an forint to shine s We ex xpect the Hunga arian forint to continue c to outperform the zlooty and the korruna this year. Financial F marke ets have taken n Hungarian politics for granteed so this will unlikely u weigh on investor se ntiment toward ds the forint. What W is more, fuundamentals arre very strong and a rating u upgrade is incre easingly likely. Hungary has a substantial cu urrent accoun nt surplus whicch will likely shield it from a sh harp deteriorattion in investor sentiment on fina ancial market. D Despite the fac ct that the Hung garian central bbank will proba ably further ease monetary m policyy in the near-te erm, this will be e very modest aand less than what w financiial markets app pear to anticipa ate. Further down the road, h igher inflationa ary pressu ures and a stro ng economy will w likely result in more aggresssive rate hikes s later on. This sh hould result in a strong rally in the forint verrsus the euro. I n short, curren nt relatively low lev vels in the forin nt are an opporrtunity to positio on for strength in later this ye ear and next year.
ABN AMRO emerg ging market currency c fore ecasts Change es in red/bold USD/CNY Y (onshore) USD/CNH H (offshore) USD/INR USD/KRW W USD/SGD D USD/THB B USD/TWD D USD/IDR B USD/RUB USD/TRY Y USD/ZAR R EUR/PLN N EUR/CZK K EUR/HUFF USD/BRLL USD/MXN N USD/CLP P
12-May 6.51 6.54 66.6 1,163 1.37 35.26 32.40 13,304 65 2.96 15.12 4.43 27.02 316 3.45 18.02 680
Q2 2016 6.55 6.55 66.5 1,165 1.36 35.00 32.50 13,200 66 2.85 15.00 4.40 27.00 310 3.60 17.25 670
Q3 2016 6.60 6.60 67.0 1,165 1.38 35.00 32.80 13,400 64 2.80 14.75 4.40 27.00 310 3.55 17.00 660
Source: ABN AMRO Grouup Economics
Q 2016 Q4 6.70 6.70 67.0 1,165 1.40 35.00 33.00 13,500 60 2.75 14.50 4.35 27.00 305 3.50 16.75 650
Q1 2017 6.75 6.75 67.0 1,150 1.38 34.80 32.80 13,400 59 2.75 14.25 4.30 27.00 300 3.45 16.50 640
Q2 2017 6.80 6.80 66.0 1 1,140 1.36 3 34.60 3 32.50 133,300 58 2.75 1 14.00 4.25 2 27.00 300 3.40 1 15.75 630
Q3 2017 6.80 6.80 65.5 1,130 1.35 34.40 32.20 13,200 57 2.75 13.75 4.20 26.50 295 3.35 15.50 620
Q4 20117 6.880 6.880 655.0 1,1220 1.335 34.000 32.000 13,0000 5 55 2.775 13.550 4.220 26.000 2990 3.330 15.225 6000
3
EM FX Weekly - Back to reality - 12 1 May 2016 6
nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin
SCLAIMER DIS N AMRO Bank ABN Gusttav Mahlerlaan 10 (vvisiting address) P.O.. Box 283 1000 0 EA Amsterdam The Netherlands
This document has been prepared by ABN AMRO O. It is solely intended to provide financial annd general information on economics. The infformation in this docum ment is strictly proprieta ary and is being supplie ed to you solely s for your informattion. It may not (in who ole or in part) be reprod duced, distributed or paassed to a third party or o used for any other purposes than stated abbove. This document is s informative in nature and does s not constitute an offerr of securities to the pu ublic, nor a solicitation to make such an offer. r. No re eliance may be placed d for any purposes wha atsoever on the informa ation, opinions, forecassts and assumptions co ontained in the docume ent or on its completenness, accuracy or fairness. No representation n or warra anty, express or implie ed, is given by or on be ehalf of ABN AMRO, orr any of its directors, offficers, agents, affiliate es, group companies, or o employees as to the accuracy or completeness of the information n conta ained in this documentt and no liability is acce epted for any loss, aris sing, directly or indirecttly, from any use of suc ch information. The views and opinions expreessed herein may be subject s to change at an ny given n time and ABN AMRO O is under no obligation n to update the informa ation contained in this ddocument after the datte thereof. Before investing in any pro oduct of ABN AMRO Ba ank N.V., you should obtain o information on va various financial and oth her risks and any poss sible restrictions that yoou and your investmen nts activities may encou unter unde er applicable laws and regulations. If, after reading this document, you y consider investing in a product, you are advised a to discuss such an investment with yyour relationship manager or personal adviso or and chec ck whether the relevantt product 窶田onsidering the risks involved- is appropriate a within yourr investment activities. The value of your inve estments may fluctuatee. Past performance is no guarantee for future e returrns. ABN AMRO reservves the right to make amendments a to this ma aterial. ﾂｩ Co opyright 2016 ABN AM MRO Bank N.V. and affi filiated companies ("AB BN AMRO").