Some Thoughts on the Upcoming US Treasury FX Report

The US Treasury will soon release its semiannual report to Congress on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” Speculation has grown that China will be named a currency manipulator, which would be the first time any country has been named since 1994. We do not think China will be named, which would be positive for Chinese assets as well as the wider EM.

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What Has Changed in EM

  • Press reports that Trump and Xi will meet on the sidelines of the G20 meeting next month
  • Pakistan has formally requested an IMF program
  • The Monetary Authority of Singapore tightened policy at its semiannual meeting
  • South Africa has a new Finance Minister
  • Turkish courts convicted US pastor Andrew Brunson, but he was then freed
  • Brazil polls are showing Jair Bolsonaro opening up a big lead over Fernando Haddad

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Brazil Rally Likely to be Limited

Jair Bolsonaro won the first-round elections in Brazil but did not have the requisite 50% support. As such, he and Fernando Haddad will go to the second-round vote will be held on October 28. With the rest of EM remaining under pressure, we do not think BRL can rally much further. However, it could continue to outperform from a relative standpoint.

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EM Preview for the Week Ahead

We saw a significant EM positioning washout last week, with weak longs getting punished. Anyone lulled into jumping aboard the EM train recently is getting crushed by sharply higher US rates. ARS and BRL bucked the trend and gained last week, but all others were weaker and were led by ZAR, CLP, and COP. MSCI fell 4.5%, while EM bond yields surged. With US rates still marching higher, EM is likely to remain under pressure this week.

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What Has Changed in EM

  • India lowered retail fuel prices in an effort to offset the impact of rising crude oil prices
  • RBI delivered a dovish surprise and kept rates steady
  • Polish central bank went from ultra-dovish to merely dovish
  • More Russian sanctions appear likely
  • Bahrain has obtained a $10 bln aid package from its Gulf allies
  • South Africa Finance Minister Nhlanhla Nene is coming under scrutiny
  • Most Brazilian polls show Bolsonaro’s support rising ahead of Sunday elections
  • Colombia central bank announced a new program to accumulate foreign reserves via the sale of put options

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Powell and Brainard Suggest Markets Underestimating Fed Hikes

Recent US economic data and Fed comments suggest markets are vastly underestimating the Fed’s capacity to tighten. While much depends on the US economic performance in 2019, we think US rates are likely to rise more than what markets are expecting. This is dollar-positive and EM-negative, to state the obvious.

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China Likely to Muddle Through

With China’s markets closed this entire week for holiday, we thought this was a good time to step back and assess how things stand in the Middle Kingdom. September PMI data released over the weekend suggest that the economy continues to slow. Indeed, growth may slow more than desired but we do not foresee a hard landing that would upset global markets.

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EM Preview for the Week Ahead

EM FX ended the week on a mixed note. For whatever reason, the major currencies took the brunt of the dollar’s rebound, with every currency down on the week except for CAD (+0.1%). EM FX was mixed on the week, with TRY, RUB, and ZAR able to carve out gains even as ARS and CZK fell. China is closed all week and so we may not see any trade-related headlines. However, China reported softer than expected PMI readings over the weekend that should keep markets nervous.

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What Has Changed in EM

  • US-China relations have worsened further
  • Bank Indonesia hiked rates 25 bp to 5.75%, as expected
  • Bangko Sentral ng Pilipinas hiked rates 50 bp to 4.5%, as expected
  • Czech National Bank sounded less hawkish after hiking rates 25 bp for the third straight meeting
  • Argentina will have a new central bank governor after Luis Caputo stepped down
  • The IMF expanded its program for Argentina to $57.1 bln, with more funds to be disbursed up front
  • Argentina’s central bank hiked rates 5 percentage points to 65%

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