What Has Changed in EM

  • China said it will impose retaliatory measures on the US
  • Bank of Israel may change its FX program by eliminating its sterilization
  • Argentina central bank changed FX rules for commercial banks that will lead to some forced dollar selling
  • Argentina President Macri is lurching left in response to his huge primary loss
  • Brazil central bank tweaked its FX program
  • Banco de Mexico delivered a dovish surprise and cut rates 25 bp to 8.0%

China said it will impose retaliatory measures on the US.  It said the next round of 10% tariffs just announced by the US violated the accord between Trump and Xi.  As a result, China The situation has been further complicated by a Trump tweet, in which he called on China to make a deal but to first “humanely solve the Hong Kong problem.”  To China, the two matters are entirely separate and Trump’s tweet plays into suspicions that the US is meddling in what China sees as a domestic dispute with Hong Kong.

Bank of Israel may change its FX program by eliminating its sterilization.  If implemented, the central bank would no longer offset FX purchases by issuing short-term Treasury bills.  This would leave more shekels in the system, which would theoretically weaken the shekel more and boost inflation.

Argentina central bank changed FX rules for commercial banks that will lead to some forced dollar selling.  The new rule established a ceiling for gross FX holdings in the spot and futures market to an amount equal to 5% of a bank’s net worth in the previous month.  Before, banks had a 5% ceiling for net FX positions, which meant banks could be long more spot dollars if they were offset by short dollar positions in the futures market.

Argentina President Macri is lurching left in response to his huge primary loss.  Key moves include eliminating the VAT on essential food products, boosting the minimum wage, and freezing gas prices for 90 days.  These are populist moves designed to win back voters but it may be too little too late.

Brazil central bank tweaked its FX program.  The move is meant to reduce the amount of outstanding FX swaps (now around $69 bln) while increasing onshore FX liquidity. Policy makers said they will sell dollars in the spot market whilst at the same time offering reverse currency swaps (which is equivalent to buying dollars in the futures market).  The aim is to offset the impact that selling dollars spot would have on the exchange rate while still allowing policymakers to boost the local supply of dollars.

Banco de Mexico delivered a dovish surprise and cut rates 25 bp to 8.0%.  It wasn’t a huge surprise, however, as the market was nearly evenly split between no move and a 25 bp cut.  The vote was not unanimous, with one member favoring steady rates.  The bank cited external and yield curve behavior, downside growth and inflation risks, and global trade tensions as reasons for the cut.