Macro Weekly 26 August 2013 - EM wobble or crisis · 2018. 8. 7. · Macro Weekly EM: wobble or...

Macro WeeklyEM: wobble or crisis?

Group EconomicsMacro Research

26 August 2013

• Big Picture: The combination of rising US long-term interest rates and an emerging market sell-off has brought

back unpleasant memories of past emerging market crises. The more healthy condition of emerging markets as

a whole should limit contagion, although there are acute vulnerabilities in a number of significant economies. At

the same time, we think that advanced economy central banks would step in to prevent the rise in yields from

getting out of control. Through all this, evidence that the global economy is strengthening continues to build.

• Eurozone: The composite PMI rose further above the 50-mark in August, reaching its highest level since June

2011. The report adds to evidence that the economy has moved out of recession and that an economic

recovery has begun. However, the fall in the jobs index emphasises that the upswing will be slow.

• US: Manufacturing activity also continued to firm on the other side of the Atlantic in August. The gain in the flash

PMI was more modest, though it was led by the forward looking new orders indicator. Meanwhile, the recent rise

in mortgage rates seem to have taken some wind out of the sails of the housing market recovery, although we

continue to look for a sustained improvement.

• Asia: The first data release from China corresponding to August suggests that the stronger activity in July could

be continuing. China’s flash PMI rose significantly that month, taking it above the 50 mark for the first time since

April. We expect economic growth to firm gradually going forward.

Main economic/financial forecasts

GDP grow th (%) 2011 2012 2013e 2014e 3M interbank rate 8/16/2013 8/23/2013 +3M +12M 2013e 2014e

United States 1.8 2.8 1.6 3.2 United States 0.26 0.26 0.3 0.3 0.3 0.5

Eurozone 1.5 -0.5 -0.5 1.3 Eurozone 0.23 0.23 0.2 0.2 0.2 0.4

Japan -0.5 1.9 1.9 2.1 Japan 0.23 0.23 0.2 0.2 0.2 0.2

United Kingdom 1.1 0.2 0.8 1.8 United Kingdom 0.51 0.51 0.6 0.6 0.6 0.6

China 9.3 7.8 7.5 8.0

World 3.9 2.9 2.9 3.9

Inflation (%) 2011 2012 2013e 2014e 10Y inte rest rate 8/16/2013 8/23/2013 +3M +12M 2013e 2014e

United States 3.1 2.1 1.4 1.8 US Treasury 2.83 2.82 2.5 2.9 2.5 3.5

Eurozone 2.7 2.5 1.4 1.1 German Bund 1.88 1.93 1.8 2.1 1.8 2.6

Japan -0.3 0.0 -0.1 2.0 Euro sw ap rate 2.20 2.24 2.1 2.4 2.1 2.8

United Kingdom 4.5 2.8 2.7 2.0 Japanese gov. bonds 0.76 0.76 0.8 0.9 0.8 1.0

China 5.4 2.7 3.0 3.9 UK gilts 2.70 2.71 2.6 2.9 2.6 3.4

World 5.0 4.0 3.7 3.7

Key policy rate 8/23/2013 +3M 2013e 2014e Currencies 8/16/2013 8/23/2013 +3M +12M 2013e 2014e

Federal Reserve 0.25 0.25 0.25 0.25 EUR/USD 1.33 1.34 1.25 1.15 1.20 1.10

European Central Bank 0.50 0.50 0.50 0.50 USD/JPY 97.5 98.7 106 115 110 120

Bank of Japan 0.10 0.10 0.10 0.10 GBP/USD 1.56 1.56 1.49 1.40 1.41 1.38

Bank of England 0.50 0.50 0.50 0.50 EUR/GBP 0.85 0.86 0.84 0.82 0.85 0.80

People's Bank of China 6.00 6.00 6.00 6.00 USD/CNY 6.11 6.12 6.08 5.95 6.05 5.80

Source: Thomson Reuters Datastream, ABN AMRO Group Economics.

2 Macro Weekly - EM: wobble or crisis? - 26 August 2013

Nick Kounis, tel. +31 20 343 5616

The Big Picture

EM: wobble or crisis?

Worries about a Fed exit have intensified again. The prospect

of the withdrawal of liquidity, higher US interest rates and in

some cases deteriorating fundamentals have led to

significant capital outflows from emerging markets. The

combination of rising US long-term interest rates and an

emerging market sell-off has brought back unpleasant

memories of past emerging market crises. The more healthy

condition of emerging markets as a whole should limit

contagion, although there are some acute vulnerabilities in a

number of significant economies. At the same time, we think

that advanced economy central banks would step in to prevent

the rise in yields from getting out of control. Through all this,

evidence that the global economy is strengthening continues

to build.

Financial market jitters about a Fed exit

Worries about advanced economy central banks moving away

from their unprecedented monetary policies and the knock-on

effects this will have on the economy and financial markets

have intensified again. This is has been particularly visible in

the advanced economy government bond markets and

emerging market assets in general. Investors have priced in

the prospect of earlier and more aggressive increases in policy

rates by the Federal Reserve and other advanced economy

central banks. At the same time, the prospect of the withdrawal

of liquidity, higher US interest rates and in some cases

deteriorating fundamentals have led to significant capital

outflows from emerging markets. This reversed some of the

large flows seen over recent years against the background of

expectations of sustained low interest rates and large central

bank asset purchase programmes. Emerging market equities

have dropped, bond spreads have widened, while many

currencies have plummeted. The central banks in Brazil, India,

Indonesia and Turkey have been forced to intervene to

underpin their respective currencies, but the authorities have

so far struggled to turn the tide.

EM fundamentals better than in 1994

The combination of rising US long-term interest rates and an

emerging market sell-off has brought back unpleasant

memories of 1994. After the Federal Reserve unexpectedly

raised the Fed Funds rate earlier in that year, US Treasury

yields soared and private sector capital flows into emerging

markets – especially to Mexico – dramatically reversed. This

led to a near default of Mexico early in 1995 in what was

dubbed the ‘Tequila Crisis’ and other emerging markets also

suffered. Rising US interest rates also helped to trigger

previous emerging market debt crises, in Latin America in the

early 1980s and in Asia in the later 1990s. However,

fundamentals for emerging markets are healthier than in the

past, and this should prevent a crisis this time around. First of

all, during the crisis in Mexico – as well as in the case of the

Asian crisis – the central bank had been pegging the foreign

currency value of the domestic currency to the US dollar.

When confidence turned foreign exchange reserves

evaporated as the authorities attempted to sustain the peg.

Eventually, pegs were abandoned, the currencies collapsed

and the countries needed be bailed out. In contrast, even

though central banks sometimes intervene to smooth

exchange rate movements, currency pegs are not common

place today.

Emerging markets - external debt

% GDP

Source: Thomson Reuters Datastream, IMF

Emerging markets - current account balance

% GDP

Source: Thomson Reuters Datastream, IMF

In addition, fundamentals for emerging markets are stronger.

On aggregate for the emerging economies, there is a current

05

1015202530354045

1980 1990 2000 2010

-4

-2

0

2

4

6

1980 1990 2000 2010


account surplus, compared to a deficit in 1994, external debt is

lower, currency reserves are much higher and more stable

foreign direct investment is now a much bigger share of capital

flows than portfolio investment. Many countries have learned a

lot of lessons from the Asian crisis. The more healthy picture

for emerging markets as a whole should limit contagion,

although there are acute vulnerabilities in a number of

significant economies.

Bond market massacre likely to be avoided

We also think that a 1994-style bond market rout will be

avoided, though the general trend in bond yields will continue

to remain up over the coming quarters. Back in 1994 the Fed

surprised financial markets when it started to move rates up,

and subsequently hiked rates rather abruptly, by 300bp within

the space of around a year. With inflation low, we think it is

likely that the central bank will not start to raise rates for an

extended period, while when it starts – likely in early 2015 – it

will probably tighten in a relatively gradual manner. In addition,

the element of surprise will probably almost certainly be

missing this time as the Fed has become increasingly

transparent and has telegraphed its moves well ahead via

forward guidance and in publishing extensive forecasts of

where it thinks the economy, unemployment and its policy rate

are heading. This is a world of difference with 1994, when the

Fed only had just started publishing its target for the fed funds

rate.

Trying to see the wood from the trees

Through all the obsession with the Fed tapering its asset

purchases, we feel that a rather important point has been

missed. The central bank has started to think about gradually

taking its foot off the gas because it is becoming increasingly

convinced that the US economy has embarked on a sustained

recovery, which should also lifting other economies around the

world through stronger exports. Investors finally seemed to

become more convinced of this idea towards the end of last

week, with equity markets and cyclical metals getting a lift as

signs that the global economic recovery is gaining momentum

continue to build. Indeed, the advance estimates of the Markit

manufacturing indicator rose in all the big economies in

August. China’s manufacturing PMI flash estimate rose to 50.1

from 47.7, which was the biggest jump since August 2010.

This adds to evidence that the slowdown in economic growth

is fading, helped by stronger advanced economy demand,

easing fears of a bank liquidity crunch and signs that the

authorities would ‘defend’ their growth target. Meanwhile, the

US Markit PMI showed a more modest gain (to 53.9 from

53.7), though the strength of the new orders indicator in the

survey and last month’s surge in the benchmark ISM

manufacturing index signal stronger upward momentum.

Meanwhile, the eurozone manufacturing PMI gained further

ground, rising to 51.3, from 50.3 the month before, which was

a 26-month high. This is helping to spur the overall eurozone

economy in to a slow recovery. The composite PMI for the

eurozone – which aggregates services and manufacturing -

jumped from 50.5 in July to 51.7 in August, reaching its highest

level since June 2011. This level is consistent with slow GDP

growth and confirms that the economy continued its

improvement in Q3 after finally coming out of recession in Q2.

We think that the global economic recovery will strengthen in

the coming months and that it will become an increasingly

dominant theme for financial markets. Central bank exit

worries are likely to remain a factor that will fuel bouts of

volatility in markets, but should not dramatically change the

outlook.

Global manufacturing gaining pace

Markit PMI advanced estimates, index

Source: Thomson Reuters Datastream, Markit

30

35

40

45

50

55

60

65

08 09 10 11 12 13

Eurozone US China


Eurozone - Economy & Rates Aline Schuiling, tel: +31 20 343 5606

Economy IComposite PMI and GDP growth The eurozone composite PMI jumped from 50.5 in July to 51.7 in

August, reaching its highest level since June 2011.The jump

resulted from roughly equal rises in the manufacturing output index

(from 52.3 to 53.4) and the services sector activity index (from 49.8

to 51.0). The composite PMI tends to track GDP growth quite

accurately and at its current level it is consistent with GDP

expanding moderately in Q3 (around 0.1-0.3% qoq) after it rose by

0.3% qoq in Q2, which is in line with our scenario for the eurozone

economy. The details of the PMI report are pointing at an ongoing

recovery as well, with the manufacturing new orders component

rising from 50.8 to 53.0 (export orders from 50.9 to 53.6) and the

orders-to-stock ratio rising to its highest level since April 2011. On

the other hand, the PMI report also signalled further labour market

weakness (the employment component in the composite PMI fell

from 48.6 in July to 48.3 in August), which will continue to weigh on

disposable income and restrain the pace of recovery.

index % qoq

Source: Thomson Reuters Datastream

Economy IIGermany: GDP growth and main components Data for eurozone construction output in Q2 confirmed the already

widely held view that weather influences reduced GDP growth in Q1

and lifted it in Q2. Construction output fell by 3.5% qoq in Q1 and

grew by 1% qoq in Q2, whereas the underlying trend seems to be

one of quarterly falls of around 1-2%. This suggests that the shift in

construction had a negative/positive impact on GDP growth of

around 0.1 percentage point in Q1 and Q2. The impact was

particularly strong in Germany and France. Indeed, the details of

German Q2 GDP (also published last week) showed that residential

investment lifted growth by 0.3 percentage points in Q2, after it

reduced growth by 0.2 pp in Q1. The other parts of domestic

demand flourished as well in Q2, with private consumption growing

by 0.5% qoq and investment in machinery and equipment rising by

0.9%, ending a series of six quarterly declines. We expect the

healthy shape of Germany’s domestic economy to keep GDP growth

well above the eurozone total this is year and next.

Percentage points qoq

Source: Eurostat

Interest rates10-Y yields Bunds and short-term rate expectations Last week, German 10-year government bond yields continued to

move higher, gaining another 6bps to 1.93%. Rising expectation that

the US Fed will start to scale back its monthly bond purchases in

September and the better-than-expected eurozone PMIs, which

confirmed that the region will continue its moderate economic

recovery, pushed bond yields higher. Looking forward, we expect

German 10-Y yields to continue to move roughly sideways during

the next couple of months, as the ECB is expected to strengthen its

forward guidance at its 5 September Governing Council meeting,

trying to lower short-term interest rate expectations in the eurozone,

while sharp drops in yields will probably be prevented by slowly

improving global economic data. We expect a second upward leg in

long-term interest rates next year, when the economy is expected to

more significantly gain momentum.

% %


-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.5

10

20

30

40

50

60

70

04 05 06 07 08 09 10 11 12 13

Composite PMI (lhs) GDP (rhs)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010Q1 2011Q1 2012Q1 2013Q1

Foreign trade Domestic demand GDP

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13

1-year ahead expectation of overnight interest rate (lhs)

10-year government bond yield Germany (rhs)


Eurozone - FX Georgette Boele, tel: +31 20 629 7789

EUR/USDEUR/USD We have seen interesting movements in currency markets last

week. First, emerging market currencies fell under heavy pressure

both versus the EUR and the USD. Second, with some delay,

currencies with lower liquidity and commodity sensitive currencies

also fell under pressure. This shows an increased level of risk

aversion. At the same time, EUR/USD continues to be driven by 2-

year interest rate differences. This signals that there may be risk

aversion in parts of the FX market, while in other parts other drivers

dominate. Going forward we expect US economic data to outpace

eurozone data and the ECB to dampen eurozone interest rate

expectations. This combination will support the USD as cyclical

currency and interest rate sensitive currency (with high positive

correlations to both interest rates and the Dow Jones) and hurt the

euro as interest rate sensitive currency. As a result, EUR/USD will

head lower. Our forecast of 1.25 at end-September may look

stretched but once the move begins it is quite possible.

Ratio Germany/US 2 yr yield level


GBPEUR/GBP, interest rate expectations EUR/GBP moved sideways for most of the week. Concerns about

emerging market currencies and better-than-expected economic

data in the UK balanced each other out at the start of the week. Last

Friday, GBP fell under pressure following a stronger-than-expected

GDP print. This is somewhat odd, because a stronger domestic

economy is supportive for GBP unless the market believes that it

could trigger policy tightening by the Bank of England. The inflation

expectations derived from the Gilts have picked up somewhat but

this move has not been large enough to justify the weakness of the

GBP. Overall for the week, the GBP moved lower both versus the

EUR and versus the USD. There were times when GBP was

perceived to have safe haven virtues. This holds true if the eurozone

crisis were to flare up again and/or if sentiment were to deteriorate

sharply resulting in a run into liquid currencies. Both situations are

quite unlikely. We favour GBP for its improvement in growth/inflation

mix. We have 0.84 for the end of September.

Interest rate in % EUR/GBP in reverse order

Source: Bloomberg

SEK/NOKNOK/SEK With some delay, the sell-off in emerging market currencies also

resulted in a fall in less liquid major currencies such as the Swedish

krona (SEK) and Norwegian krone (NOK). This highlights once more

that these currencies are not safe-haven currencies. During the

eurozone crisis, some investors had stamped these currencies as

safe-haven currencies. They are diversification currencies that

perform well in specific environments. The SEK feels like a fish in

the water if global and domestic growth are improving, when investor

sentiment is constructive and when the central bank is not dovish.

The NOK thrives well when commodity prices move higher and

domestic interest rates are expected to increase. We have been

vocal about our preference for SEK for a while. The outperformance

of the SEK versus the NOK last week shows that in the current

nervous environment this has been a good choice, despite the fact

that they both underperformed the EUR. EUR support has mainly

come from interest rate expectations and we expect these

expectations to cool.

level

Source: Bloomberg

1.20

1.25

1.30

1.35

1.40

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan 13 Mar 13 May 13 Jul 13

Ratio German 2-year/US 2-year yield (lhs) EUR/USD (rhs)

0.78

0.80

0.82

0.84

0.86

0.88

0.900.5

1.0

1.5

2.0

2.5

3.0

Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13

90 days Sterling interest rates Sept 2016 (lhs) EUR/GBP (rhs)

1.04

1.08

1.12

1.16

1.20

1.24

1.28

10 11 12 13


US - Economy & Rates Peter de Bruin, tel +31 20 343 5619

Economy IISM manufacturing index and Markit flash PMI Data during the week suggested that the recovery continued to gain

pace. Markit’s preliminary manufacturing PMI rose from 53.7 to 53.9

in August, keeping it on a modest upward trend. While the increase

was relatively small, it was driven by a firm gain in the more forward

looking new orders index. This suggests that we will see ongoing

increases in manufacturing activity in coming months, which is in line

with our view of strengthening final domestic demand growth.

Meanwhile, data during the week suggested that the labour market

recovery gained some steam. Although initial jobless claims rose to

336k in the week ending August 17, up from 323K the week before,

the underlying trend is down. Last week’s claims data covered the

survey week for August’s official labour market report and during the

past month we saw a modest improvement in claims. Indeed, the

four week moving average fell to 331K down from 347K in July’s

survey week. As a result, we expect August’s official labour market

report to show a 200K gain in payrolls, up from 162K in July.

level


Economy IIExisting and new home sales Meanwhile, the recent rise in mortgage rates seem to have taken

some wind out of the sails of the housing market recovery, although

we continue to look for an improvement. Indeed, new home sales fell

by 13.4% in July, following a 3.6% rise the month before. Although

existing home sales rose by 6.5% in July, this was because the

recent rise in mortgage rates was providing a strong incentive for

potential home buyers to rush to close the deal in order to avoid

further rises in mortgage rates – according to the National

Association of Realtors. Still, we are not too worried that the housing

market recovery will grind to a halt. For a start, housing affordability

remains at relatively high levels, while – judging from the limited

supply of existing homes – house prices are likely to continue to rise.

Meanwhile, a strengthening of the labour market recovery should

also help to underpin the housing market, while banks seem slightly

more willing to provide mortgage loans, according to the latest

Senior Loan Officer’s surveys.

millions millions


FedBloomberg survey of economists July’s Fed meeting minutes were roughly in line with expectations,

with members being ‘broadly comfortable’ to moderate the pace of

security purchases ‘later this year’. Although we continue to think

that the Fed will announce a tapering of its QE programmes at the

September meeting, this does not seem to be written in stone.

Indeed, a few members wanted to be ‘patient’ in order to evaluate

additional information, while a few others preferred to move earlier.

There was also an extensive discussion about an eventual

strengthening of the Fed’s forward guidance. Indeed, several

members were willing to consider lowering the unemployment rate

threshold, if additional stimulus were to be needed. However, a few

participants expressed concern that this might induce the public to

start viewing the unemployment rate threshold as a policy tool, which

also could be moved up, thereby reducing its credibility. All in all,

barring a negative surprise in August’s nonfarm payrolls report, we

continue to expect the Fed to start gradually reducing its QE

programmes during the September meeting.

%, portion expecting September tapering of asset purchases

Source: Bloomberg, ABN AMRO Group Economics

45

50

55

60

09 10 11 12

ISM manufacturing index Markit flash manufacturing PMI

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Existing home sales (lhs) New home sales (rhs)

0

10

20

30

40

50

60

70

4-5 June 19-20 June 18-22 July 9-13 Aug


Interest rates10-Y Treasury yields and Vix volatility index Treasury yields remained unchanged over the week, although it was

a bit of a bumpy ride. As in the previous week, tapering fears

continued to haunt the Treasury market. These fears were reinforced

by the Fed’s July meeting minutes, which showed that FOMC

members were ‘broadly comfortable’ to start reducing the Fed’s QE

programmes ‘later this year’. While this resulted in a sharp rise in

yields in the middle of the week, yields came down again on Friday,

as a weaker-than-expected housing market report raised fears that

the recent rise in rates would dampen the economic recovery.

Looking further down the road, we think that the near-term prospect

for gains in yields is limited, as financial markets have mostly come

to terms with the Fed starting to reduce the pace of its purchases.

Moreover, the Fed will only gradually take its foot off the accelerator,

while – if financial conditions tighten too much – it is likely to signal

that rates will remain on hold for longer than currently is the case.

That said, we expect a second leg up in yields in 2014, as the

recovery steps up a gear, and we move closer to the Fed’s first rate

hike.

% index


0

10

20

30

40

50

60

1

2

3

4

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

10-Y Treasury yields (lhs) Vix volatility index (rhs)


Asia - Economy & FX Maritza Cabezas, tel +31 20 343 5618Roy Wellington Teo (FX), tel. +65 65 978 616

China HSBC flash PMI During the recent turmoil China’s currency showed more resilience

than those of other Asian countries whose fundamentals are weaker.

The modest improvement in economic activity since July likely

contributed to making China more attractive. The first data release

corresponding to August, suggests that the stronger activity in July

could be continuing. China’s flash PMI rose to 50.1 in August from

47.7 above the 50 mark for the first time since April. The

improvement in the flash PMI was broad based. The new orders

component rose significantly by 3.9 pts to 50.5. We think that

China’s third quarter will be slightly better than the second quarter.

Meanwhile, the National Bureau of Statistics released the 70-city

house price index for July. New home prices increased in 62 cities,

stayed flat in 4 cities and declined in 4 cities. The largest cities

continued to lead the increase in house prices, including Beijing,

Guangzhou, Shenzhen and Shanghai. There has been no change in

property controls with the new administration. We expect prices to

stabilise during the rest of the year.

index


Other Asia GDP growth losing some momentum in India India and Indonesia were the most affected countries in Asia during

the recent turmoil in emerging markets. India’s central bank was

quite active in trying to calm markets. Last week, central bank

authorities in India announced that they would resume open market

operations to contain long-tern yields and provided guidance on

short-term yields, suggesting that further increases were off the

table. The volatility associated with the prospects of Fed tapering will

likely continue affecting these countries until more clarity is brought

about surrounding the reforms that they will implement in the coming

time to reduce their imbalances, while more details are also

expected from the Fed regarding its exit strategy. We think that the

recent episode is a temporary correction. Although economic activity

has been losing some momentum, particularly in India, in general

the external positions of several Asian countries are resilient and

there are sufficient buffers, including international reserves to

mitigate the impact of market instability.

% yoy


Asia FX IAsian currencies’ spot returns last week Last week, Asian currencies closed lower for the second

consecutive week as the market continued to favour the USD ahead

of next FOMC meeting in September. Reversal of capital flows

continued to weigh on the Indonesian rupiah (IDR), Indian rupee

(INR) and Thai baht (THB) in particular, as these countries suffer

from relatively weak economic performances and current account

imbalances. On the other hand, losses in the Singapore dollar

(SGD), South Korean won (KRW), Chinese yuan (CNY) and Taiwan

dollar (TWD) were minimal due to better economic data releases in

the past few months, current account surplus and healthy central

bank FX reserves. The Reserve Bank of India has healthier and

larger FX reserves compared to Bank Indonesia and hence a

stronger capability to defend weakness in the INR. We expect strong

measures to be implemented when the new governor takes over

leadership on 5 September. We remain comfortable with CNY as our

top Asian pick.

%

Source: Bloomberg

40

45

50

55

60

08 09 10 11 12 13

3

6

9

12

Mar-

08

Oc

t-08

Ma

y-0

9

De

c-0

9

Ju

l-10

Feb

-11

Sep

-11

Ap

r-12

No

v-1

2

Ju

n-1

3

India Indonesia

-4.5

-3.5

-2.5

-1.5

-0.5

CNY TWD SGD KRW THB INR IDR


Asia FX - IIUSD/JPY The behaviour of USD/JPY has changed since US government bond

yields have started rising in May. In normal circumstances, higher

US yields and wider yield-spreads are the main driving force for a

higher USD/JPY. Since May, this has not been the case. The

Japanese yen has been very resilient and even strengthened versus

the USD. The main reason for this was a deterioration in overall

sentiment, mainly caused by the sell-off in emerging market

currencies. This scenario also played out last week. The JPY

received support from lower emerging market currencies. But as the

USD also received support, USD/JPY showed a lack of direction.

This continued up to the moment that sentiment improved, which

happened on Thursday following the better-than-expected global

PMI data. Going forward, we expect sentiment to further improve on

better economic data. This should increase the willingness of

investors to set up carry trades with the JPY as funding currency.

Therefore we hold on to our view of a higher USD/JPY this year and

next year.

Level

Source: Bloomberg

1.0

1.2

1.4

1.6

1.8

2.0

2.2

85

90

95

100

105

Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13

USD/JPY (lhs) 10y US-JP yield spread (rhs)


Commodity exporters - FX Roy Wellington Teo, tel. +65 65 978 616Georgette Boele, tel: +31 20 629 7789

AUD/NZDAustralia Dec 13 futures implied cash rate Last week, weakness in emerging market spilled over into the

Australian and New Zealand dollar. Moreover, the RBA minutes

signalled that official rates will be cut if the AUD doesn’t weaken

further. As a result, The AUD dropped below 0.90. The NZD also

came under pressure after the RBNZ introduced further restrictions

on housing mortgage loans which will take effect on 1 October and

reduce the urgency to raise interest rates. Looking ahead, we expect

the RBA to cut the cash rate by another 25bp in November due to

sub-trend growth and inflation remaining within targets, and to keep

it at 2.25% throughout 2014. This is not fully priced in by the market.

As a result, and due to our bullish USD view in general, we have

lowered our 2013 and 2014 year-end target for the AUD from 0.90

and 0.85 to 0.86 and 0.80 respectively. We have also lowered our

NZD/USD forecasts for 2014 from 0.76 to 0.74 as the market is

pricing in more rate hikes next year than our 50bp expectations. Our

forecasts for this year remains at 0.76.

%

Source: Bloomberg

USD/CADUSD/CAD Last week, the sell-off in emerging market currencies that spilled

over to the rest of the FX markets, lower oil prices and weaker than

expected domestic data releases all weighed on the CAD. Widening

interest rate differentials between the US and Canada pushed

USD/CAD higher during the course of the week. The rebound of

Canada’s economy has been slower than expected due to the

government’s attempt to cool the housing market and weaker than

expected demand for the country’s commodity exports. With growth

in the US expected to outpace growth in Canada in the coming

years, and oil prices to trend lower, we are less optimistic on the

CAD going forward. We now expect USD/CAD to head higher

towards 1.06 by the end of this year and 1.08 in 2014. However,

Canada’s strong economic links with the US will continue to support

the CAD and, hence, we expect it to outperform both the AUD and

NZD in 2013. We maintain our view that the BoC is likely to hike

interest rates by 25bp in 2014 Q4, which is priced in by the market.

Level

Source: Bloomberg

USD/BRL USD/BRL Last week, emerging market currencies fell under heavy pressure as

US yields moved higher. Brazil’s weaker domestic growth, widening

current account deficit, political uncertainty and sticky inflation have

all add to the negative sentiment. The central bank has stepped up

intervention involving currency swaps and loans to support the BRL

and to dampen inflationary pressures. This has fuelled expectations

about the size of the rate hike this week. Market consensus is for a

50bp rate hike to 9%. We have revised our year-end forecasts for

USD/BRL to 2.3 for 2013 and 2.2 for 2014. The main reasons for the

new forecasts are our downward adjustments on the fundamental

picture such as growth and current account deficit. Although there

will be volatility in FX markets in the near term and further BRL

weakness is possible, we believe that we are currently in an over-

shooting phase and, once global growth worries recede and financial

markets calm down, the BRL and other EM currencies will likely

recover somewhat.

Level

Source: Bloomberg

2.00

2.25

2.50

2.75

3.00

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

-0.10

0.00

0.10

0.20

0.98

1.00

1.02

1.04

1.06

Jan-13 Feb-13Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13

USD/CAD (lhs) 10y US-CA yield spread (rhs)

1.6

1.8

2.0

2.2

2.4

2.6

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13


WEEKLY ECONOMIC CALENDAR

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Day Date Time Country Market indicator Period Latest outcome ABN AMRO

Expectation

consensus

Monday 26/08/2013 00:45:00 NZ Trade balance - NZD mln Jul -777.0

Monday 26/08/2013 07:00:00 SG Industrial production - % mom Jul -3.1 1.2

Monday 26/08/2013 14:30:00 US New durable goods orders - % mom Jul 3.9 -3

Tuesday 27/08/2013 09:30:00 NL Producer confidence manufacturing - index Aug -3.5 -3.0

Tuesday 27/08/2013 10:00:00 DE Ifo - business climate - index Aug 106.2 107.1 106.9

Tuesday 27/08/2013 11:30:00 ZA GDP - % yoy 2Q 1.9 1.9

Tuesday 27/08/2013 13:59:00 GB Nationwide house prices - % mom Aug 0.8 0.4

Tuesday 27/08/2013 15:00:00 US S&P/Case Shiller house price index Jun 1.1 1.0 1.0

Tuesday 27/08/2013 16:00:00 US Conference Board cons. confidence - index Aug 80.3 79.5 79.1

Wednesday 28/08/2013 10:00:00 EC M3 growth - % yoy Jul 2.3 1.9 2.1

Wednesday 28/08/2013 12:00:00 GB CBI retail sales - balance (%) Aug 17.0 22.0

Wednesday 28/08/2013 13:59:00 BR Policy rate - % Aug 28 8.5 9.0

Wednesday 28/08/2013 16:00:00 US Pending home sales - % mom Jul -0.4 0.5 0.1

Thursday 29/08/2013 01:00:00 KR BOP current account - USD mln Jul 7237.3

Thursday 29/08/2013 08:45:00 FR Business confidence manuf. - index Aug 95.0 96.0

Thursday 29/08/2013 09:30:00 SE BOP current account - SEK bn 2Q 67.9

Thursday 29/08/2013 09:30:00 SE Retail sales - % mom Jul 0.6

Thursday 29/08/2013 09:55:00 DE Unemployment change - thousands mom Aug -7.0 -10.0 0.0

Thursday 29/08/2013 09:55:00 DE Unemployment - % Aug 6.8 6.8 6.8

Thursday 29/08/2013 14:00:00 DE CPI - % yoy Aug P 1.9 1.7 1.7

Thursday 29/08/2013 14:30:00 US GDP - % qoq annualised 2Q S 1.7 2.3 2.3

Friday 30/08/2013 01:00:00 KR Industrial production - % mom Jul 0.4 0.3

Friday 30/08/2013 01:05:00 GB GfK Consumer confidence - index Aug -16.0 -15.0

Friday 30/08/2013 01:30:00 JP CPI - % yoy Jul 0.2 0.6 0.6

Friday 30/08/2013 01:30:00 JP Unemployment - % Jul 4 4 4

Friday 30/08/2013 01:50:00 JP Industrial production - % mom Jul P -3.1 3.5 3.6

Friday 30/08/2013 09:00:00 CH Leading economic indicator - index Aug 1.2 1.3

Friday 30/08/2013 10:00:00 NO Unemployment - % Aug 2.8

Friday 30/08/2013 10:30:00 GB BoE mortgage approvals - thousands Jul 57.7 58.6

Friday 30/08/2013 11:00:00 EC Economic sentiment monitor - index Aug 92.5 94.0 93.7

Friday 30/08/2013 11:00:00 EC Core inflation - % yoy Aug A 1.1 1.1 1.2

Friday 30/08/2013 11:00:00 EC CPI - % yoy Aug 1.6 1.3 1.4

Friday 30/08/2013 11:00:00 EC Unemployment - % Jul 12.1 12.2 12.1

Friday 30/08/2013 14:00:00 BR GDP - % yoy 2Q 1.9

Friday 30/08/2013 14:00:00 IN GDP - % yoy 2Q 4.8 4.7

Friday 30/08/2013 14:30:00 CA GDP - % yoy Jun 1.6

Friday 30/08/2013 14:30:00 US Consumer spending - % mom Jul 0.5 0.3 0.3

Friday 30/08/2013 15:45:00 US Chicago Fed - business confidence - index Aug 52.3 53.0 53.0

Friday 30/08/2013 15:55:00 US Univ. of Michigan cons. confidence - index Aug F 80.0 82.0 81.2

Source: Bloomberg, Reuters, ABN Amro Group Economics

Macro Weekly 26 August 2013 - EM wobble or crisis · 2018. 8. 7. · Macro Weekly EM: wobble or...

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