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  • Emerging Markets Debt Daily

    Currency Intervention Noise Is Back

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 17, 2019

    The currency intervention noise is getting stronger in Brazil and China. Mexico’s central bank maintains a hawkish stance in light of persistent inflation risks.

    The currency intervention buzz is getting stronger in Brazil and China.
    There are few fundamental reasons for this type of action in Brazil, but political noise (street protests, President Jair Bolsonaro's son’s money-laundering investigation) seems to unnerve the market. The central bank used sporadic interventions to dampen currency volatility in the past. This was done in a responsible manner, and there is a great deal of confidence that the situation will not get out of control. In China, local media reports suggested that the central bank (PBoC) would defend the 7/USD threshold, which may be tested if negative trade talk headlines continue for longer. The negative impact on confidence was mentioned as a main reason, but fundamentally, a combination of moderating growth and disappearing current account surpluses argues for the weaker yuan going forward.

    Mexico’s central bank (Banxico) affirmed its policy credentials yesterday, keeping the key rate on hold at 8.25% and issuing a hawkish statement. Inflation remains the central bank’s main concern. Inflation expectations continue to grind higher, and yearly core inflation accelerated sharply to 3.87% in April. The board believes that economic slack alone may not be able to offset the inflationary impact of such factors as the higher minimum wage. External risks and uncertainty surrounding the state-owned giant Pemex and its potential impact on the sovereign rating also ranked high among the Banxico’s concerns. We hope the Banxico’s current board “lives long and prospers”—it is at the core of Mexico’s institutional framework. But we have a nagging feeling that it may fall victim to President Andres Manuel Lopez Obrador’s “reform” agenda.

    The unexpectedly strong University of Michigan activity survey in the U.S. (see chart below) revived hopes for the growth outlook. All components surprised to the upside, with the sentiment and expectations indices looking particularly strong. Another notable development was a sizable jump in short-term and long-term inflation expectations. Today’s release looks too optimistic to justify the current market expectation of 45bps of rate cuts in the U.S. in the next 12 months. We hope the forthcoming data releases will provide more color on the subject.

    Chart at a Glance

    Source: Bloomberg LP


    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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