Wednesday, January 19

The best emerging currency trades move from early to late

Some of the best performing emerging market currencies for the year may lose popularity as the rationale for rate hikes to cope with inflation shows early signs of abating.

The Brazilian real and the Russian ruble have already been under pressure this quarter, and traders speculate that central banks could back off the pace of monetary policy tightening. Both currencies were among the best performers during the first half of the year, but have since been affected, with the real sinking around 4.5% since the end of June, more than any other major currency tracked by Bloomberg.


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The tightening cycle was in full force in emerging markets long before the U.S. Federal Reserve began setting a timeline to reduce its bond-buying program, which President Jerome Powell said on Friday could begin as soon as this. anus. The first hikes in Russia and Brazil have helped contain flows from emerging markets, although authorities are still balancing the need to fight inflation with the desire to support economies hit by Covid-19.

Brazil’s central bank has already raised its key rate by 325 basis points this year, more than most of its peers, and forward market bets point to slowing rate hikes after the September meeting. In Russia, traders expect the central bank to increase its benchmark by about 50 basis points over the next three months, down from more than 130 points in early July.

“Early hikers, where the speed of the tightening has been in line or in some cases faster than historical bull cycles, are likely to slow the pace of hikes or come to a halt in the coming months,” Goldman strategists said. Sachs Group Inc. run by London. Kamakshya Trivedi based on a note this month. “The second half of the emerging market bull cycle is likely to be even broader, with more central banks beginning some form of normalization.”

Next to the walk

This evolving rate environment presents a crucial opportunity for traders to take advantage of fluctuations in the next phase of the emerging market tightening cycle, according to Goldman Sachs.

South Korea became the first major Asian country to raise interest rates on Thursday, with more hikes pending as the focus shifted from propping up the economy to curbing a debt-fueled asset bubble. Poland and Colombia could be next. That offers some upside potential for lagging currencies like the Korean won and the Polish zloty, protecting their relative yield advantage against accelerating prices and the prospect of higher US rates.

The won rose before giving up its gains after the governor of South Korea’s central bank remained ambiguous about the timing of the next move. The currency should strengthen with a “Bank of Korea, economic resilience and an oversold technical gain,” said Mitul Kotecha, chief emerging markets strategist for Asia and Europe at TD Securities in Singapore.

“Markets are likely to continue to chase performance, which means those countries with relatively aggressive monetary stances and higher real returns will benefit the most,” Kotecha said.

Balancing act

It’s a delicate balancing act for policymakers, who have to fight rising prices without stifling growth as the threat of Covid-19 variants continues to stalk the global economy. Poland, for its part, has signaled that it wants to keep monetary policy relaxed until economic recovery is on track despite rising inflation.

Still, the Eastern European country may be next in line after the economy expanded at its fastest annual pace in the second quarter, with Deutsche Bank AG forecasting gains in October and November. This year, the zloty has underperformed the currencies of Hungary and the Czech Republic, which have embarked on aggressive monetary tightening campaigns to keep inflation under control.

Poland stands out as an emerging market that has been “behind the curve when it comes to raising rates,” said Oliver Harvey, a London-based strategist at Deutsche Bank. Its moderate political stance has hit the currency, which the bank says is 10% undervalued according to its models. If the central bank became more aggressive later this year, the zloty could be a recovery operation, he said.

A new aggressive sentiment is also emerging in Colombia, where the central bank has signaled that it could soon join the regional trend of higher interest rates as inflation accelerates. Policymakers see the economy expanding at 7.5% this year. Economists surveyed by the bank see that policymakers will increase the key rate by 75 basis points this year, from a record low of 1.75%.

In the coming week, investors will also be on the lookout for rate decisions in Chile and Zambia.

Policy signs

  • Chile’s central bank is expected to raise its key interest rate by 50 basis points while employing a more aggressive tone amid fiscal stimulus measures and higher-than-expected inflation readings.
  • Zambia’s central bank is expected to keep rates unchanged, with inflation slowing as the global streak of the kwacha helped control import costs.
  • In Mexico, investors will look for clues about the direction of monetary policy in the quarterly inflation report to be released by the central bank on Tuesday.
  • Turkey’s August inflation reading forecast for Friday will be closely watched as it will likely influence the next monetary policy decision on September 23. Lured by the nation’s yields, investors have returned to Turkey’s debt market amid relief that the new central bank governor has not succumbed. to calls by President Recep Tayyip Erdogan to cut interest rates.
    • Wednesday’s data will likely show that Turkey’s economic growth accelerated to 21% in the second quarter from a year earlier due to a favorable base effect.
    • “The momentum in economic activity is likely to continue to soften in the future in the face of current uncertainty about the pandemic situation, high currency volatility and interest rates,” wrote economists at Citigroup Inc., including Ilker Domac and Gultekin. Isiklar, on a note. .

PMI data

  • Data from China will offer a first look at how the economy fared in August after sweeping restrictions were re-imposed to contain the spread of the delta variant. Manufacturing and non-manufacturing PMIs will be released on Tuesday.
    • The figures from China will reflect the impact of the latest Covid-19 cases, which resulted in closures at seaports and airports, with repercussions on trade and industry, as well as tourism and leisure, according to a note from analysts. by ING Groep. by Robert Carnell in Singapore. The yuan has weakened this month.
  • South Korea, Taiwan, Malaysia, Indonesia, Thailand and the Philippines will release factory activity indicators on Wednesday. China’s Caixin Manufacturing PMI will also be released on the same day.

What else to look at

  • India is expected to report on Tuesday that its GDP growth accelerated to 21% in the second quarter from 1.6% in the previous three months due to a low base effect.
    • The year-on-year growth rate masks the underlying weakness caused by the latest Covid-19 spread, which was much more lethal than last year, according to ING.
    • The Indian rupee has lost about 1% this year.
  • South Korea reports industrial production on Tuesday, trade figures on Wednesday, and final second-quarter GDP on Thursday.
  • Thailand is forecast to report on Tuesday that its current account balance remained in deficit in July, which could curb last week’s exuberance over the baht after authorities said the virus outbreak had peaked. The current account balance has suffered a deficit since November.
  • Indonesia will start a series of CPI readings for August on Wednesday, followed by South Korea on Thursday.
  • Traders will be on the lookout for any potential market impacts from Brazil’s 2022 budget proposal, which is due by August 31.
    • The nation is also scheduled to release national unemployment figures for June on Tuesday, as well as a reading of second-quarter GDP data the following day.
    • Industrial production figures for July, to be released on Thursday, will reflect weak performance in the auto sector, according to Bloomberg Economics.
  • Colombia’s urban unemployment data for July, to be released on Tuesday, will show a decline from the previous month amid economic reopens, according to Bloomberg Economics.

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