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  • Emerging Markets Debt Daily

    Markets Unfazed by “Currency Manipulator” Tag

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    August 06, 2019

    There was little market fallout from the “currency manipulator” tag slapped on China by the U.S. Mexico’s investments contracted further in May, feeding into the market expectation of additional policy easing.

    Not to be outdone in the latest round of trade “discussions”, the U.S. slapped a currency manipulator tag on China
    , placing it in the jolly good company of Switzerland, Germany, Taiwan, South Korea, Japan, Israel, Sweden and, until recently, the Czech Republic (this is a mix from the U.S. monitoring list and who Natalia is watching). The swarm of reports duly warned about “the consequences”. However, they are not particularly scary in practical terms (advising, expressing concerns, developing plans, etc.), which explains why the market reaction was short-lived. China’s central bank also lent a helping hand through its main signaling tool—the daily fix, keeping it below 7/U.S. dollar. With risky assets on a rollercoaster ride in the past few days, make sure you tune in to Portfolio Manager Eric Fine’s chat on Bloomberg Radio, as he will be talking about emerging markets in the wake of recent developments.

    Mexico’s investment dynamics does not bode well for the country’s growth outlook. Yearly gross fixed investments dropped by 7.4% in May—one of the worst readings after the global financial crisis (see chart below)—and the weakness was widespread, affecting both construction and machinery/equipment. High real interest rates is one of the reasons behind the decline, and this helps to explain why the market continues to price in 55bps of rate cuts for the next six months.

    Russia’s downside inflation surprises are back—together with firmer expectations of additional policy rate cuts. Both headline and core inflation undershot consensus in July, moderating to 4.6% and 4.5% year-on-year, respectively. Today’s releases support the central bank’s dovish guidance, with another rate cut likely taking place in early September. Russia’s underwhelming growth outlook supports this view. The usual risks are geopolitics, volatile food prices and the exchange rate (albeit the latest round of sanctions proved less punitive than initially feared).  

    Chart at a Glance: Mexico’s Investments Dynamics Continues to Disappoint

    Mexico’s Investments Dynamics Continues to Disappoint

    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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