Group Economics
EM FX Weekly
Macro & Financial Markets Research Roy Teo , Marijke Zewuster & Peter de
Brazilian real outlook deteriorates
Bruin ,+65 6597 8616
31 July 2015
Emerging market currencies lower BRL impacted by worsening fiscal situation and negative S&P outlook RUB under pressure on the back of lower oil prices CNY: Depreciation undercurrents building
Emerging market currencies lower
Friday’s meeting. But the bigger picture will be that falling
Emerging market currencies closed lower in the past week due
inflation and a weak economy will keep the CBR in a loosening
to weaker commodity prices and concerns of capital outflows
mode. We therefore continue to think that the CBR’s key rate
as tighter monetary policy in the US nears. The Russian ruble
will be heading to 9% at the end of the year.
(RUB) and the Brazilian real (BRL) were among the worst performers, each sliding by about 3% in the past week.
CNY: Depreciation undercurrents building The offshore non-deliverable forward market (CNY NDFs are
BRL could weaken further
cash settled against the daily yuan fix) implies that the yuan
The recent further weakening of the BRL reflects worries about
fixing will remain stable this year, as the authorities seek a
fiscal consolidation and the fear that Brazil might lose its
stable currency ahead of the IMF review to include the yuan in
investment grade rating. The government last week revised the
the SDR basket. We maintain our view that a weaker Chinese
primary surplus target for 2015 from 1.1% of GDP to only 0.2%
yuan is needed to support and inflate the economy. The strong
and the 2016 target from 2% to 0.7%. Although very few
yuan and uneven pace of global recovery have pressured
believed that the previous targets were feasible, the strong
profits of both state owned and private industrial enterprises.
reduction did come as an unpleasant surprise. Fiscal
Various data also suggest that the central bank intervened in
adjustment is key for Brazil to maintain its investment grade
the currency market to stabilize the yuan in June as capital
rating. The deterioration in the fiscal outlook was therefore the
outflows continued. As authorities have indicated that a more
main reason for S&P to announce a negative outlook, while
flexible exchange rate regime is likely in the coming months,
confirming the BBB- rating. Moody’s and Fitch have a negative
investors are gradually positioning for a weaker yuan. This is
outlook, but their rating is still two notches above junk status.
evident as both the offshore and onshore yuan deliverable
While all recent economic data point to a deepening of the
forwards have been rising since early June as investors
recession in the second quarter, inflation continues to rise,
speculate and hedge against future yuan depreciation. The
reaching 8.9% yoy in June. The recent increase of the Selic
options market demand to hedge weakness in the yuan has
rate by 50bp to 14.25% on 29 June therefore was in line with
also increased. We expect the yuan to decline towards 6.30
market expectations. The Copom signalled that the intention is
against the US dollar this year as the yuan is expected to
to keep the Selic at 14.25% for a prolonged period from here
remain on the weaker side of the yuan trading band when the
on. However as it is difficult to see how Brazil will get out of the
latter is further liberalised (from current +/-2% to +/-3%).
vicious circle of a deepening recession, a worsening fiscal situation and higher inflation, the BRL will remain under pressure. Another rate hike is therefore still possible. Russian ruble slides on oil The slide in the RUB reflected the drop in oil prices that we have seen over the past days. The drop in the RUB brings back memories of the financial instability that we saw in December of last year and has prompted the authorities to take a more cautious stance. For instance, while we think that the CBR will soon start to buy foreign FX again, it has paused its daily FX purchases. We also think that the central bank will cut its key rate at a gentler pace than earlier this year at this
ABN AMRO emerging market currency forecasts USD/CNH 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
29-Jul 6.21 63.92 1,157 1.36 34.84 31.44 13,450 60 2.76 12.56 4.12 27.50 309 3.36 16.27 666
Q3 2015 6.26 65 1,130 1.37 33.80 31.30 13,500 52 2.85 12.20 3.95 27.50 315 3.15 15.50 630
Q4 2015 6.30 65 1,140 1.40 34.00 31.50 13,700 50 2.85 12.20 3.90 27.50 320 3.20 15.50 630
Source: ABN AMRO Group Economics
Q1 2016 6.35 65 1,140 1.42 34.50 31.80 13,800 48 2.85 12.20 3.85 27.40 320 3.20 15.25 635
Q2 2016 6.37 66 1,150 1.43 34.80 32.00 13,900 47 2.85 12.20 3.85 27.25 325 3.25 15.25 640
Q3 2016 6.38 66 1,150 1.44 34.80 32.20 14,000 46 2.85 12.20 3.85 27.00 325 3.30 15.00 645
Q4 2016 6.40 66 1,150 1.45 34.80 32.50 14,100 45 2.85 12.20 3.85 26.75 330 3.40 15.00 650