EM FX Weekly
Group Economics Macro & Financial Markets Research
09 June 2016
EM FX swings higher Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
A lower US dollar and higher commodity prices support EM FX EM monetary policy decisions were mixed RBI, NBP and COPOM left monetary policy unchanged… …while the BoK surprised with a rate cut
Georgette Boele Co-ordinator FX & Precious Metals Strategy
More SGD strength envisaged in June; higher risk of October easing Chinese yuan volatility and depreciation expectations decline
Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
A lower US dollar and higher commodity prices support EM FX Since the end of last week, emerging market currencies have rallied strongly following the much weaker-than-expected US employment report. This report and the comments of Fed Chair Yellen have resulted in substantial downward adjustment of Fed rate hike expectations. Our base case remains for no Fed rate increase this year, while market participants still see a 58% probability. In addition, higher commodity prices have also supported currencies of commodity exporting countries. The Brazilian real, Colombian peso, Russian ruble and South African rand were the main outperformers and rallied between 4.5-7% versus the US dollar since last Thursday. The latter mainly because rating agency Fitch decided to keep South Africa’s credit rating at BBB- (lowest investment grade) with a stable outlook.
CRB Index and EM Commo FX CRB Index(lhs)
USD/EM Commo FX
350
300
300 400 250 500 200 150
600 12
13 CRB Index (lhs)
14 15 16 USD/EM Commo (rhs, reverse scale)
Source: Bloomberg
Insights.abnamro.nl/en
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EM FX Weekly - EM FX X swings higher - 09 Ju une 2016
RBI, NBP N and COP POM left mon netary policy unchanged… … The Re eserve Bank o of India (RBI) le eft interest rates s unchanged aas expected, bu ut financial markets are more co oncerned wheth her Governor Rajan R will stay ffor another term m. Our Asia he RBI to keep p the repo rate unchanged forr the remainderr of 2016. economist expects th The RBI is now focussing more on im mproving mone etary transmisssion. Moreoverr, inflation has ris sen, there are u upward inflation risks stemming from wage increases and weather conditiions and the ecconomy has ac ccelerated in Q1. Q The Na ational Bank off Poland also le eft monetary policy unchangeed as expected d. All but one policy maker will be rreplaced and Adam A Glapinsky is taking oveer the helm from m Governor Marek Belka. They h have signaled that they will co ontinue the currrent policy of stable interes st rates as theyy would like to leave room to respond to pote tential shocks. Moreover, economic growth rem mains healthy and a inflation will likely pick upp later this yearr due to positiv ve base effects . cy unchanged and a kept its biaas neutral. It sttated that the The COPOM in Brazzil also left polic high le evel of inflation and inflation expectations e be eing distant from m objectives do not allow enough room for an e easing of mone etary policy. La ater this year w we expect rate cuts, c se of lower infl ationary pressures, a stronge er real and to nneed to support the becaus economy.
…while BoK unexp pectedly cut interest rate The Ba ank of Korea (B BoK) unexpecttedly lowered th he 7 day repo rate by 25bp to o 1.25%. A more accommodative a e monetary policy setting is desired d as corpporate restructu uring is likely to put some downwa ard pressure on n economic activities. Indeedd, the BoK has highlighted that the decision to lo ower the repo rate r was unanimous given thaat downside ris sks to economic growth in tthe second half of this year ha ave increased.. As a rate cut was w mostly priced in by financial markets, losse es in the South h Korean won w were limited. Indone esia rupiah re ecovers; foreig gn currency re eserves declin ne likely to be e temporary In Asia a, the Indonesia a rupiah (IDR) recovered by 3% 3 as carry traades resume. Separately S foreign n currency rese erves in Indone esia declined to o USD 103.6bnn in May, the lo owest level since January J this ye ear. Bank Indon nesia calmed market m fears byy clarifying thatt the decline in foreign currency re eserves is temp porary due to seasonally s highh demand for fo oreign currency payments a and external go overnment debt payments. Cuurrent level in the t foreign currency reserves re mains healthy,, covering 7.6 months m of impoorts and extern nal govern nment debt payyments. Our ye ear end USD/ID DR forecast is 13,500. More SGD S strength envisaged, re esilient S$NEE ER increase riisk of Octoberr easing The Siingapore dollarr (SGD) has strengthened by about two cennts to 1.35 and is likely to strengthen further tow wards 1.3350 in i the coming weeks. w Currenttly, the S$NEE ER is around similarr levels when th he Monetary Authority A of Sing gapore (MAS) last eased poliicy earlier this ye ear in April. A s ustained resilie ence in the S$N NEER will increease the risk th hat the MAS may sh hift the mid-poiint of policy band lower later this t year in Oct ctober. Our yea ar end USD/S SGD forecast iss 1.40.
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EM FX Weekly - EM FX X swings higher - 09 Ju une 2016
Chine ese yuan vola atility and dep preciation expectations deecline Recen nt data on Chin a’s FX reserve es point to stabilisation, contriibuting to a furtther easing of hard d landing fearss. In May, China a’s FX reserves fell by USD 228 bn to USD 3192 3 bn. Although this drop wa as a touch larg ger than expectted, FX reservees were more or o less flat if exchan nge valuation e effects are disc counted for. That is encouragging, even morre so if we take in nto account tha at the US dollarr strengthened in May as marrkets did price in Fed rate hikes more m strongly o on the back of hawkish signals by Fed Boarrd members. This shows that ca apital outflows ffrom China hav ve moderated even in more tturbulent times. All in all, we still think it is unlikkely that the sh harp capital outflows seen in late 2015 and early 2016 peat. will rep Exportt growth was sllightly weaker than t expected in May. Inflatioon also eased lower as food in nflationary presssures have de eclined. In our view, v the level in the yuan is not n a key impediment to exportts growth and inflation. Hence e there is little economic justiification to devalu ue the currencyy sharply. Indee ed, financial market volatility aand yuan deprreciation expecttations have de eclined. We ma aintain our view w that the yuann will depreciate e moderrately and grad dually this year to 6.70 agains st the US dollarr. For more dettails, please refer to o our FX Watch h – Chinese yu uan depreciatio on to remain grradual and mod dest publish hed on 6 June 2016.
Volatiility and deprreciation expe ectations in CNY C decliness Forward d points
Volatiility
300 00
12 2
250 00
0 10
200 00
8
150 00
6
100 00
4
50 00
2
0 J Jan-15 Apr-15 5 Jul-15
0 Oct-15 Jan-16 Apr-16 A
6mth USD/CNY Y NDF pts (lhs) 6mth USD/CNY Y Volatility (rhs) Source: Bloomberg
ABN AMRO emerg ging market currency c fore ecasts
USD/CNY Y (onshore) USD/CNH H (offshore) USD/INR W USD/KRW 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
09-Jun 6.56 6.58 66.7 1,156 1.35 35.20 32.40 13,287 64 2.90 14.86 4.34 27.02 311 3.36 18.23 674
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
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EM FX Weekly - EM FX X swings higher - 09 Ju une 2016
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