Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 08, 2020
Argentina seeks to clarify its debt relief position. Thailand eases capital outflow rules to combat “excessive” currency appreciation.
I know it sounds a bit weird, but it is a relatively slow day in emerging markets—outside of global drivers like signs of U.S./Iran de-escalation. Well, maybe with the exception of Argentina, which continues to provide interesting headlines. The latest bunch includes reports that the province of Buenos Aires called for consultations with holders of its 2021 bond regarding “financial relief.” The next bond payment is less than three weeks away, but today’s price action suggests that the market hopes for a quick and friendly resolution.
The U.S. Treasury’s (seriously delayed) report on currency manipulators is due any day now, so Thailand’s move to further ease capital outflow rules in order to reduce appreciation pressures attracted a lot of attention this morning. The Thai baht was the top performing currency among emerging markets majors in 2019, aided by massive current account surpluses (see chart below). The side effects, however, were persistently low inflation and additional headwinds to growth (exports account for about 50% of nominal GDP). So, the central bank’s decision is understandable, but it could result in the country’s being branded a currency manipulator (even though most investors won’t lose sleep because of it).
Poland’s recent inflation spike did little to change the central bank’s dovish state of mind. Even though nobody expected a hike at today’s rate-setting meeting, many analysts were hoping to see at least some reflection of higher inflation pressures in the statement. Instead, the governor brushed off inflation concerns, saying that the spike did not move the projected inflation path upwards and that he expects price pressures to normalize after Q1. One development outside of Poland that’s worth keeping an eye on is the European Central Bank meeting on January 23—any shift in rhetoric might have wider regional repercussions.
Chart at a Glance: Thailand’s Massive External Surpluses Drive Currency Appreciation
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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