Emerging Markets Weekly – EM trading starting the year quietly
US non-farm payrolls will cap the short, first week of the year. We have a slightly higher than consensus expectation for an addition of 190 thousand jobs, but the impact on EM FX should be small, with EM investors bracing for what Trump will do after taking office on Jan 20.
■ The RUB looks set to be one of the most attractive targets in 2017 due to the possibility of reduced US-Russia tensions, an orthodox and hawkish CBR, and, until recently, a favorable outlook for oil prices. We still expect the price of Brent oil to average $55.0/bbl in 2017. Yet, near-term downside risks have risen markedly with US producers ramping up capacity at an increasingly rapid pace and speculators adding to their strongly net long WTI positioning (increasing the risk of a reversal). We expect the RUB to depreciate roughly by the rate of inflation in 2017, but the relative stability seen in 2H is unlikely to be repeated in2017.
■ The National Bank of Romania will not deliver any surprises when it announces its rate decision on Fri, keeping the monetary policy on hold at 1.75%. Nov CPI inflation remained firmly in negative territory, but the base effects from the VAT cut will fade, which together with strong domestic demand growth looks set to push inflation to around the 2.5% central target in 2017. A key risk for the RON in 2017 is further fiscal slippage, which would push EUR/RON (now 4.53) to above the 4.63 last seen in 2012.
■ The TRY is selling off partly because of a deadly terrorist attack on an Istanbul nightclub on New Year’s Eve. However, regrettably terrorism is now rampant in Turkey and is no longer a major driver of the TRY. Key for the TRY will be interest rates in the US and the EU. Ankara has attempted, in vain, to reduce the attention on the CBRT’s monetary policy by reducing the number of rate setting meetings to 8 times per year from 12. However, the reduction will instead leave the market guessing for clues about the CBRT’s intentions in between meetings with increased volatility as a result. The TRY has been the worst performer of all EM currencies that we track since Jan 2008, primarily as a result of the CBRT’s unwillingness, or inability to tighten monetary policy in a timely fashion. We expect the pattern to continue in 2017 and USD/TRY (now 3.54) to hit new highs before the CBRT is forced to tighten monetary policy sharply to restore confidence in the currency and bring down inflation expectations. The TRY is hanging by a thread and while a sudden sell-off is not our main scenario, the risk of USD/TRY jumping to 3.70 (potentially on stronger than expected US data) before the next CBRT meeting on Jan 24 is not small.
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■ The BRL appreciated by almost 18% against the USD last year, a performance that it will not repeat this year. The growth outlook is weak, monetary policy will be eased, and the REER is close to its long-term average, which point to the BRL weakening in nominal terms by up to 9% against the USD to 3.60 (now 3.27). The Dec Markit manufacturing PMI fell 1 point to 45.2, while the Nov industrial production (due Thu) will remain largely flat compared to Nov 2015 when it had dropped by more than 10%. The key support factors are still-high interest rates and progress on structural and microeconomic reforms.
■ This year, the MXN will not repeat its dismal 2016 performance against the USD, when it depreciated by nearly 17%. Nevertheless, it will be a challenging year for MXN bulls due to uncertainty over what actions US President-elect Donald Trump will take in relation to NAFTA, as well as immigration policy. Rising prices, especially the petrol price increase announced in Dec, will weigh on consumer and business confidence. Nevertheless, in real (trade-weighted, inflation-adjusted) terms, the MXN is very cheap, suggesting that much of the bad news has been priced in already.
■ China kept the yearly $50,000 limit on individuals’ purchase of foreign exchange. The legitimate use of the quota, according to Chinese officials, is for foreign travel and education, not investment. In a sign of growing concerns about capital outflows, the State Administration of Foreign Exchange (SAFE) increased the paperwork required and tightened demands on banks to report suspicious transactions. Nevertheless, expect heavy activity in CNY when banks reopen on Tue and individuals start using their freshly-reset, yearly quotas. Key to watch will be the PBoC’s Dec international reserves on Jan 7. A fall below the psychological $3trn level will prompt additional verbal interventions, as well as tighter capital controls. An expansion of the number of currencies in the CFETS’s RMB index to 24 from 13 (including the KRW, ZAR, MXN, and TRY) is unlikely to have a significant impact on the value of the RMB. Nevertheless, it will help justify RMB movements against individual currencies, most importantly the USD, when the broad index remains stable.
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