What Has Changed in EM

  • Hong Kong government’s response to the protestors is hardening
  • Bank of Korea delivered a dovish hold
  • Bank of Israel delivered a dovish hold
  • Argentina plans to extend maturities on its debt
  • Brazil central bank called a pure dollar auction for the first time in more than 10 years

Hong Kong government’s response to the protestors is hardening. Several of the protest leaders have been arrested, and police warn of more arrests to come.  Other protest leaders have been attacked by masked men. Elsewhere, press reports that the mainland China authorities dismissed a proposal by Chief Executive Carrie Lam to withdraw the controversial extradition bill, which is one of the key demands from the protestors.

Bank of Korea delivered a dovish hold.  It kept rates steady at 1.50%, as expected, but the 5-2 vote showed two dissents in favor of an immediate cut.  Governor Lee noted it has room to respond if necessary.  BOK just cut rates last month, so a pause was expected.   If the data remain weak, we think BOK will cut at its next policy meeting October 16.

Bank of Israel delivered a dovish hold. It kept rates steady at 0.25%, as expected. However, it dropped language from its previous statement that it was on a path toward gradual rate hikes. Instead, the bank wrote that “The interest rate will not be increased for an extended period. Moreover, if necessary, the Committee will take additional steps toward making monetary policy even more accommodative” if needed.

Argentina plans to extend maturities on its debt.  The government will reportedly postpone $7 bln of payment on short-term local notes and seek “voluntary reprofiling” of $50 bln in longer-term debt.  New Economy Minister Lacunza said Argentina will also start talks with the IMF regarding repayment of its $44 bln in aid.  These moves may ease default risk near-term, but investors are left wondering what could happen if opposition candidate Fernandez wins in October. Because of this news, S&P cut Argentina’s rating from B- to Selective Default.

Brazil central bank called a pure dollar auction for the first time in more than 10 years. Previously, the bank had been selling dollars in the spot market whilst offsetting this with reverse swap auctions to minimize the impact on the exchange rate and to keep its net FX exposure unchanged.