Fed, Russia and Greece determine EM risk

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Per Hammarlund, chief emerging markets strategist at SEB argues that the Central Bank of Russia will cut its main policy rate to 12%.

The Federal Open Market Committee (FOMC) will announce its rate decision on Wednesday, April 29. We along with consensus believe that rates will remain on hold, with the key uncertainty revolving around guidance for future rate hikes. We believe that the Fed will start hiking in September, which should support EM assets over the coming months.

Appetite for CEE assets and currencies will be subdued due to lack of progress in negotiations with Greece, and a decision by EU finance ministers not to disburse more aid for now.

The week in Asia started with a light data calendar, with Monday trading turning out to be relatively uneventful. The North Asian currencies continue to outperform, buoyed by CNY stability, massive inflows into Taiwanese stocks, and continued current account driven flows into Korea. The South Asian currencies are experiencing position unwinds, which have pushed USD/MYR lower and USD/INR and USD/IDR slightly higher, whilst PHP is largely unchanged.

The FOMC’s decision on Wednesday (April 29) is the big data point for the week on macro front. After cutting by 25bps in March, the Bank of Thailand (BOT) will likely hold its key policy rate stable at 1.75% when the MPC announces it new decision on April 29. Nevertheless, with consumer prices falling and sluggish economic activity, we believe that the BOT will cut again in June by 25bps, leaving the risk for this week on the downside.

We expect Russia’s central bank to cut its main policy rate by 200bps to 12% when it convenes on Thursday this week. The Bloomberg consensus foresees a 100bps cut, although 10 of 26 economists surveyed believe the cut will be bigger. Inflation is still high at 16.9% y/y in March, but it has fallen sharply in m/m terms, indicating that the rise in inflation has been caused primarily by one-off factors.

The central bank hiked the policy rate by 650bps to 17% at an emergency meeting during the RUB crisis in December last year. However, high interest rates have been hurting the economy. With the USD/RUB rate now having dropped by almost 27% since January 30 and government borrowing costs by some 300 bps to 400bps, the conditions that required the exceptional rate are no longer there.

In addition, the CB needs to stem the appreciation of the RUB as it eats into government revenue from oil. LATAM Both Brazil (April 29) and Mexico’s CBs (Apr 30) will meet to discuss monetary policy this week. Brazil’s economy is clearly in for a rough period, but the BCB will hike the policy rate by 50bps to 13.25% to dampen inflationary pressures. Inflation is running at over 8%, well above the BCB’s 6.5% upper limit, and the MPC members have expressed concern that efforts to contain inflation are still not sufficient.

Nevertheless, with USD/BRL having dropped by 10% since March 19, the BCB may decide to slow the pace of tightening to 25bps. With economic activity disappointing, inflation under control at close to 3% (Banxico’s mid-target), and the USD/MXN rate stabilising between 15.0 and 15.5, Banx

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