EM FX Weekly
Group Economics Macro & Financial Markets Research Georgette Boele tel,+31 20 6297789
No respite for EM FX
3 September 2015 • • •
EM FX declined further because of weak sentiment and weak domestic data …despite the stabilization in the Chinese equity market and commodity markets The Chinese yuan, Czech koruna and Hungarian forint outperformed
No respite for EM FX...
Chinese FX reserves and USD/CNY
Emerging market currencies have fallen further this week. This
FX reserves in bn
was mainly because of weak investor sentiment, global growth worries and weaker domestic economic data. Meanwhile, other
USD/CNY (reverse scale)
5,000
5.0 5.5
financial markets stabilised over the week. For example,
4,000
Chinese authorities managed to stabilise Chinese equity
3,000
6.5
moved slightly higher compared to last Friday’s close. The US
2,000
7.0
dollar did not show a clear upward trend, nor did 10y US
1,000
6.0
markets. In addition, the CRB index stabilised and oil prices
Treasury yields.
7.5 8.0
0
8.5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
…with Brazilian real and the Russian ruble being most out of favour
China FX Reserves (lhs)
USD/CNY (rhs)
Source: Bloomberg
The Brazilian real was the worst performing currency, falling almost 5% versus the US dollar so far this week. Financial markets remain concerned about the fiscal trajectory, risk of losing its investment grade, the state of the economy and politics. For example, industrial production fell sharply reinforcing worries about the state of the economy. The central bank left interest rates unchanged at 14.25% and its statement was neutral. It is likely that at the next meeting it will keep interest rates unchanged. However, a further sharp weakening of the real could make the central bank hike again. The Russian ruble also fell and surprisingly ignored the slight increase in oil prices. Manufacturing data came in below market consensus while CPI was a touch higher. As a result, there is less room to manoeuvre for the central bank to cut interest rates to support the economy. The Chinese yuan outperformed… This week Chinese PMIs came in around market expectations and Chinese equity markets stabilised somewhat. There have been reports that China has sold US and European bonds in order to support its currency. This is reflected by the sharp decrease in foreign exchange reserves (see graph). The Chinese authorities added measures that make it more costly for traders of forward contracts to bet on swings in the yuan. The recent appreciation of the CNY eases fears that the adjustment of the exchange rate regime would trigger a sharp CNY weakening. We expect a modest yuan weakening ahead.
…so did the Czech koruna and the Hungarian forint Yet another week that the Czech koruna and the Hungarian forint outperformed. Their economies are strong, they are major commodity importers and have a low exposure to China. EUR/CZK has come under pressure and is currently just above the floor in EUR/CZK at 27.0. It is likely that financial markets will test the central bank’s willingness to keep the floor in place. It has been a great success and has given strong support to the economy. If the economy continues to strengthen, a floor in EUR/CZK may no longer be necessary. We expect that the central bank will fight any strengthening of the koruna beyond 27 versus the euro this year and in the first half of next year.
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
03-Sep 6.36 6.45 66.2 1,190 1.40 35.84 32.51 14,170 67 2.96 13.52 4.23 27.50 314 3.76 16.89 692
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 13.50 13.50 4.20 4.15 27.50 27.50 315 315 3.70 3.70 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 13.25 4.10 27.40 315 3.60 16.75 690
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 14,600 55 3.00 13.00 4.05 27.25 310 3.55 16.50 680
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 14,800 55 2.95 13.00 4.00 27.00 310 3.55 16.25 670
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,000 55 2.90 12.50 4.00 26.75 310 3.50 16.00 660