Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 14, 2020
Political noise continues to weigh on the Brazilian real. The market is evaluating a possibility of another cut in the reserve requirements for banks in China.
Brazil’s political noise refuses to subside, pushing the currency closer and closer to the psychologically important 6/USD handle. The morning brought more local headlines suggesting that President Jair Bolsonaro might have interfered in the Federal Police investigation of his family members, which is not particularly confidence-inspiring. Lingering uncertainty about Economy Minister Paulo Guedes’s influence on the policy agenda and the barely-positive real policy rate provide additional explanations why the real underperformed its regional peers so far this year – and by a wide margin (see chart below).
China’s central bank decided not to roll over the maturing medium-term lending facility (MLF), reinforcing expectations that it is setting up the stage for another cut in banks’ reserve requirements. This might be true, but other plausible explanations include the proximity of the National People’s Congress (22 May) and technical issues (such as the standardization of the MLF timing). The latter would be a part of the general trend to simplify China’s monetary policy framework, making it more transparent and effective (think about China’s transmission mechanism, which is far from perfect).
The Turkish currency was surprisingly unresponsive to headlines that the European Central Bank rejected the country’s request for a swap line. And it also ignored a weaker than expected industrial production (IP) print, which flipped from 8.5% year-on-year in February to -2% in March. It also failed to notice another decline in the international reserves and a big net outflow from the local bond market. Maybe investors are just getting accustomed to all this negativity – or maybe state-owned banks continue to lend a helping hand.
Chart at a Glance: Brazilian Real – Lagging Behind Regional Peers
Source: Bloomberg LP
Note: The exchange rates are normalized (31 December 2019 = 100)
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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