Driving forces behind EM currencies

Much has been talked about the Malaysian Ringgit downward movement against the US Dollar. As to date MYR is the worst performing currency against USD in the Emerging Market (EM) space, comprising of countries in the regions of LATAM, Asia (Malaysia included) and MENA,

Therefore to understand such currency behaviour, I’d gather few notes hoping that’ll be able to clear the confusion on this

One reason explaining why EM currencies behaving dismally versus the USD is due to not a single EM central bank has engaged in quantitative easing (QE) practices, as done by other developed central banks, like the US, Europe and Japan. Similarly not a single developed central bank has bought EM assets as part of their QE programmes.Thus, EM assets along with their currencies, have in effect suffered in a state of benign neglect. Apart from that sentiment also mirrors the destination of QE flows, where the EM countries have experienced a slowdown in their share of financial flows – even outflows in some cases.

The strong USD has also pushed down commodity prices, which has benefitted the majority of EM countries, sans Malaysia, being an oil exporting country. However, in a market that rarely distinguishes between EM countries and tends to focus on the negative stories, even the lower commodity prices have reinforced the EM scepticism. USD rally was predicted based on the view that the US economy would grow faster and that the Fed would hike sooner than the other developed countries. Market has been expecting the hike since beginning of the year. However now the USD has became so strong that, at the margin, it is impending growth and influencing Fed policy in a dovish direction. When the Fed failed to hike the rate in September, of which citing the reason of slowdown in external markets, the USD has become the victim of its own success.

The reason as to why we haven’t seen a rally in EM currencies is due to no serious outright downward pressure on USD; where there is absent in US inflation and also due to volatility of EM FX.

Some positive news for EM currencies..

Firstly, EM currencies are cheap after four years of unrelenting depreciation. Secondly, if the USD now flat-lines, the expected annual depreciation of EM currencies will also be less, probably closer to zero per year than -10% per year of the past few years. Having said that, 2016 is still expected to be benign for EM currencies and bond market, where it is only forecasted to rebound in the year 2017 onwards.





3Q2015 Market Updates

So many things happening in the past 4 months or so.

Here’s the snippets

Market has been crazy volatile in the months of August and September. Lots of bond sell downs in the emerging market space, where and especially malaysia that wasnt spared from it. a combination of global risks, weak inflation and tighter financial conditions encourage the monetary policy heading to year end more dovish that before. on top of that, the emerging market assets have weakened largely due to commodities slump, slowdown in China (growth forecast below 7%?), strength in dollar as well as the possibility of US’ Feds policy tightening

Oil price again plummeted to below $50 level. Coupling that with slowdown in China and devaluation of yuan, have brought ringgit down to 17 years of historical low against dollar. It was crazy.

But as they say, whatever goes up must come down. Now we see market has somewhat less shaky, given that the US’ Feds ‘delaying’ interest rate hike and the market has also managed to price in the rate hike up until 1Q next year. Currently the US dollar position has also calmed a bit that brought ringgit level up a bit.

Brent crude oil hovers at below $50 level which serves as an indicative level for revenue generation forecast for the country. Now analysts are expecting the level will go up to $70 starting only in 2017 onwards. Hence, 2016 continues to be a volatile year.

Expectations from the market:-

  • Further targeted stimulus by PBoC on China stability
  • Abenomics aint working, sorry Mr. Abe. Japan is viewed to be facing a possible relapse into recession. Given that S&P has cut Japan rating to A+ from AA- in September due to economic support for Japan’s sovereign creditworthiness has continued to weaken in the past three to four years. Plus they are also in view that the govt’s economic revival strategy is not able to reverse the deterioration in the next few years.
  • US’ Fed hike by year end, up by 25bps. If not, then by 1Q2016.

Honestly none of analysts and economists I met is positive for 2016, at least for the first half. I’m not seeing any bright spot either.