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.
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.
- 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
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.
New Finance Minister Tito Mboweni will present his mid-term budget review this Wednesday. We think he will do just enough for the agencies to give him the benefit of the doubt until his next budget statement in early 2019. Longer-term, we see more downgrades and loss of investment grade from Moody’s.
- The US Treasury decided not to label China (or any other country) a currency manipulator
- China’s top finance officials worked to calm markets
- Malaysia cut its growth forecast and scrapped plans to balance the budget by 2020
- The IMF and Ukraine have reached a staff-level agreement on a new 14-month stand-by program
- Chile central bank started the tightening cycle with a 25 bp hike
- US-Mexico relations are tense due to reports of a refugee caravan heading north to the US Continue reading “What Has Changed in EM”
Through mid-October 2018, foreign currency Uridashi issuance totaled $7.6 bln. If this pace is sustained, the full year total of $9.6 bln would represent an increase from $8.4 bln in 2017 but would fall short of the $12 bln issued in 2016.
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.
- 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