Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 12, 2020
China introduced measures to slow the pace of the currency appreciation. Turkey posted another larger than expected current account deficit.
China’s decision to slow the brisk pace of the currency’s appreciation by lowering the risk reserve ratio for foreign exchange (FX) forward transactions had a predictable impact on the renminbi this morning (=75bps weaker against U.S. dollar as of 9:40am ET, according to Bloomberg LP). There are plenty of fundamental factors, however, that should support the renminbi going forward, including the improving interest rate differentials, the global bond index inclusion and fewer growth headwinds. The latter helps to explain why China’s equities (like the Shanghai Composite Index) continued to rally, ignoring the central bank’s FX announcement.
“Failure to launch” is the best way to describe the state of Turkey’s external adjustment. We’ve got another wider than expected current account print this morning (USD4.63B in August), and it is not trending in the right direction (see chart below) despite the depreciating currency. And the reason is simple—the state-driven growth push via credit expansion (once we net out gold imports and tourism revenue). To be fair, there are some hopeful signs, including the surprising 200bps policy rate hike, stabilizing terms of trade and the recent credit slowdown. Another rate hike of a decent size (to push the real policy rate into positive territory) might be a good idea.
Today’s emerging markets (EM) inflation “smorgasbord” had offerings for every taste. India’s annual inflation unexpectedly surged to 7.34%, Romania’s annual inflation unexpectedly dropped to 2.45% and annual inflation in the Czech Republic thankfully did not move much (3.2%). One unifying theme is that most inflation prints are driven by volatile one-offs and COVID-related distortions—making it difficult to draw longer-term conclusions. Still, extreme price movements can limit central banks’ policy space, putting more pressure on the governments to act. In India’s case, these considerations help to explain today’s announcement of a small fiscal package to support consumption.
Chart at a Glance: Turkey Current Account – Still Not Moving in the Right Direction
Source: Bloomberg LP
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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