What Has Changed in EM

  • Pakistan central bank hiked rates after devaluing the rupee for the fifth time this year
  • Bank of Israel hiked rates unexpectedly by 15 bp to 0.25%
  • Russia central bank Governor Nabiullina said it may resume FX purchases if market conditions remain stable
  • President-elect Bolsonaro appointed little-known Admiral Albuquerque as Energy and Mines Minister

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EM FX Model For Q4 2018 UPDATE

  • The broad-based dollar rally stalled recently following the more dovish market take on the Fed
  • We believe markets are vastly underestimating the Fed’s capacity to tighten in 2019
  • MSCI EM FX is likely to eventually test the September low
  • Every EM currency is down in 2018
  • We see continued divergences within the asset class
  • Our 1-rated (strongest fundamentals) grouping for Q4 2018 consists of SGD, RUB, THB, CNY, and MYR
  • Our 5-rated (weakest fundamentals) grouping for Q4 2018 consists of RON, CLP, LKR, ARS, and TRY

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Bank of Korea Meets as Downside Risks Grow

Bank of Korea meets Friday and may resume its tightening cycle. However, it’s a tough call and we see risks of a dovish surprise as the economy struggles with growing headwinds. Political risk remains high too as North-South relations are in a sort of limbo.

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Where Do We Stand With Regards to the Dollar Rally?

We think that the market is overreacting to two Fed speeches and underreacting to ongoing firmness in the US data. Yes, the US economy is slowing but nothing beyond what was within expectations. Growth, while slowing from the blistering 4.2% SAAR pace in Q2, is still robust.

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EM Preview for the Week Ahead

EM FX caught a bid last week as markets took Fed comments to be on the dovish side. Given how firm the US data have been of late, we do not agree with the newly prevailing view that the Fed will be more cautious. However, we must respect the price action and so this dollar correction will likely extend until the market’s Fed view reverses again.

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EM Preview for the Week Ahead

EM FX has come under renewed pressure as the dollar staged a broad-based recovery after the FOMC meeting. Data this week is likely to show continued robustness in the US economy, cementing a December hike by the Fed. Elsewhere, concerns about China, Italy, and Brexit are likely to weigh on market sentiment. We remain negative on EM.

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EM Preview for the Week Ahead

EM FX got some traction last week as the dollar rally stalled. Still, event risk remains high in many EM countries, notably Brazil, Mexico, South Africa, and Turkey. The FOMC meeting this week is widely expected to see no actions, but the Fed should signal that a December hike is on track. As it is, US yields are marching higher again. We believe the global backdrop for EM remains negative.

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What Has Changed in EM

  • US-China relations may be thawing
  • Malaysia fiscal policy is deteriorating
  • Turkey central bank revised its inflation forecasts up sharply
  • Political risk remains high in South Africa
  • A congressional ally of Brazil President-Elect Bolsonaro downplayed the chance of passing pension reforms anytime soon
  • The Mexico City airport fiasco has dented market sentiment
  • Fitch cut the outlook on Mexico’s BBB+ rating from stable to negative

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EM Preview for the Week Ahead

EM FX ended last week on a firm note but the week was still a bad one. We think risk-off impulses will continue and likely intensify in the coming weeks. As such, we remain negative on EM as an asset class. China will provide its first glimpse of October with PMI readings, while US jobs report Friday will be the data highlight of the week. 

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