Emerging Markets Debt Daily
China Appreciation – Too Much Of A Good Thing?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 27, 2021
We've got a bunch of developments this morning pertaining to key storylines in EM.
China's exchange rate policy and EMFX: The rembinbi is trading at the strongest level against the U.S. Dollar since mid-2018 (see chart below), buoyed by the post-pandemic growth rebound, the widening interest rate differentials with the U.S., and the index-inclusion inflows. However, the one-way appreciation trade might be too much of a good thing for the central bank (PBoC). We are not talking about a major regime shift, but there are definitely some policy tweaks. At its latest meeting with market participants, the PBoC clearly emphasized that two-way FX fluctuations are the norm. The PBoC also raised the offshore borrowing limits for some banks recently. China's exchange rate policy is closely watched by the EM investment community due to the renminbi's stronger correlations with the rest of EMFX.
EM "hawk talk"/"taper talk": Polish local rates got spooked by the central bank's lower than expected auction intake, which led to suggestions that the policy taper might already be on the cards. The central bank's governor indicated recently than the taper would happen before a rate hike, which the market does not see until much later this year. But the unequivocal hawkish guidance from Poland's regional neighbors (Hungary, the Czech Republic) puts monetary authorities in the spotlight.
Global inflation and food prices: The spike in global food prices worsens the inflation optics in many EMs, creating policy challenges for central banks. A potential upside risk might come from an unexpected source – the EU sanctions on Belarus (following the forced landing of the Ryanair flight). The sanctions might include restrictions on Belarussian imports. But Belarus is the home of one of the largest potash producers in the world (Belaruskali) – hence concerns about the impact on fertilizers and agricultural prices down the road.
China’s Renminbi – Strongest in Years
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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