21 September 2018
What lies beneath Asian currencies pain?

The China-US trade spat, higher oil prices, a hawkish Fed and an appreciating dollar have had almost all emerging market currencies heading for cover. But what is it about the Philippine peso, Indian rupee and the Indonesian rupiah that has soured investor appetite more than others?

Currencies in Asia feel the heat

Emerging market currencies have been rattled in 2018 as a series of events including a hawkish Fed and appreciating dollar, the China-US trade spat and higher oil prices have had almost all regional currencies heading for cover amid increased risk-aversion and capital flight.

But some Asian currencies have been hit harder than others with the Indian rupee (INR), Indonesian rupiah (IDR) and the Philippine peso (PHP) all testing multi-year (in some cases historical) weakness in tandem with heightened USD demand from corporates.

And although the risk-off scenario has spared no one, these three currencies appear to have taken the brunt of the impact. So what is it about these three currencies that has soured investor appetite more than others?

Brazil: The presidential race narrows

The likely outcome of the presidential election has narrowed considerably, but Brazil’s post-election economic policy outlook remains highly uncertain. Still, we believe that the BRL’s outlook has improved with the falling risk of a Ciro Gomes victory and signs that Fernando Haddad, if elected, would pivot to a more pro-market rhetoric.

Is it already a two-horse race?

The latest polls confirmed that the presidential election race has been substantially polarised over the past week, with PT/anti-PT sentiment contributing to exacerbate voter support towards these polar opposites, and draining support from the middle. 

As a result, voter support to (right-leaning) Jair Bolsonaro has been rising towards 30% while support to (left-leaning) Fernando Haddad, the newly-anointed successor to Lula, is quickly rising towards 20%, increasing the gap from the remaining candidates. If this trend persists over the coming week, we should be able to eliminate our previous assumption that the first-round race will be hard to call until very close to the October 7 election. 

In fact, it’s almost as if the first-round ballot has become a test-run for a runoff (October 28) between Bolsonaro and Haddad, with both sides now aiming for a first-round victory sizeable enough (ie, larger than 50% of the valid votes) to eliminate the need for a runoff. A first-round victory remains unlikely, but it is no longer as far-fetched as it seemed just one week ago.

For now, third-runner Ciro Gomes has survived the Haddad tsunami surprisingly well, becoming a possible third-way alternative to the PT/anti-PT narrative. His main competitor is Haddad however, and a bitter fight in the Northeast, where both compete for primacy, could end up helping Bolsonaro, if Gomes’s supporters fail to support Haddad in an eventual second round, assuming that Haddad’s rise is sustained. 

Bolsonaro is generally considered to be a second-best option for investors, after market-favourite Geraldo Alckmin. With Alckmin's chances dropping sharply, investors are now primarily focused on assessing who would prevail in a Bolsonaro vs. Haddad runoff. Second-round simulations suggest that this is going to be a tight and polarised race, still very difficult to call.

Popular demand for “something new” gives Bolsonaro an edge

A key concern is Bolsonaro’s high rejection rate, the highest among all the candidates, which makes him a relatively weak contender in runoff simulations. And his difficulties could increase if the candidate fails to make a full recovery relatively soon, which could increase the chances of a left-leaning victory in the October 28 runoff. 

Lula also remains a formidable force, propelling Haddad forward, but the impressive enthusiasm demonstrated by Bolsonaro’s supporters, if social media is any indication, with important grass-roots elements, suggests that he may ultimately have an edge over Haddad. The surge in that enthusiasm is due to both the rise in anti-PT sentiment, as Haddad has risen in the polls, and the persistent anti-establishment sentiment, which has been attached to Bolsonaro’s candidacy from the start. 

The latter (ie, the anti-establishment sentiment) is what should give Bolsonaro an edge, in our opinion. With Lula and his proxies winning every presidential race since 2002, popular support for “something new” is likely to prevail.

Swiss National Bank: Extremely cautious as risks increase

The central bank kept rates on hold at its September meeting and appears to be really cautious signalling a dovish monetary policy over the coming years

Unchanged monetary policy

The Swiss National Bank maintained the target range for the 3-month Libor between -1.25% and -0.25% and the interest rate on sight deposits was unchanged at -0.75%. Moreover, the SNB reiterated its willingness to intervene if needed in foreign exchange markets to prevent an appreciation of the Swiss franc. The central bank still believes the franc is “highly valued”. It insisted on the appreciation of the franc over the past three months and believes the situation on the foreign exchange market is still fragile.

The SNB is in a tricky situation with some very strong growth indicators but it also has concerns about the global external environment which could impact the domestic market and CHF valuation. 

Norges Bank raises rates, but signals a more cautious stance

While the central bank hiked rates to 0.75%, as expected, an unexpected downward shift in the forecast for future interest rates suggests policy-makers are more concerned about the outlook than before 

The Norwegian central bank raised the policy rate to 0.75%, in line with expectations. But a reassessment of momentum in the domestic economy and concern about the effect of higher rates impacting household spending has prompted the Bank to revise down its forecast. 

The new rate path is only marginally lower and still signals two more hikes by the end of 2019. But this shift in the opposite direction of market expectations - for a higher rate path signaling the potential for three hikes in 2019 - suggests the NB has become cautious.

The key reason behind the central bank's caution seems to be concern that raising rates too quickly could have a material impact on Norwegian households, which are heavily indebted and exposed to higher interest rates 

The policy statement indicates the next rate hike will come in 1Q19, which most likely means March, given the NB’s preference to move policy rates at meetings where they have a new forecast and a press conference.

Some of the new-found caution appears driven by global risks, in particular, the potential impact of US protectionism. The NB also notes that higher oil prices, while supportive of the Norwegian economy through increased investment in the North Sea, dampens growth elsewhere in the global economy, and that has an off-setting negative effect on Norwegian exports.

But the key reason behind the NB’s caution seems to be concern that raising rates too quickly could have a material impact on Norwegian households, which are heavily indebted and exposed to higher interest rates. The NB also refers to the uncertainty surrounding the effect of the first rate hike in seven years.

The key takeaway from today’s meeting is that the NB may be uncomfortable with hiking rates at a faster pace than twice per year. Given that this appears driven in large part by the high level of debt among Norwegian households – a factor that isn’t going to change anytime soon – it looks like the bar for a faster pace of tightening is fairly high.

The Bank may still be open to a more aggressive stance once the initial uncertainty around the effect of higher rates passes (and if other sources of uncertainty such as the US-China trade war also fade). 

If the krone doesn’t strengthen as much as the central bank anticipates (EUR/NOK has risen by close to 1% since the policy announcement), that may also support the case for tighter policy. But for now, we think the most likely path for policy rates is two hikes in 2019, starting in March next year.

Disillusion mounts in Europe’s housing market

Most Europeans expect house prices to increase further over the next twelve months, reducing affordability and leaving many young people feeling shut out of the market. And the situation is expected to get even worse

A majority of people in Europe believe housing in their country is on the wrong track. And the main reason is because it's expensive. This is not restricted to one country, it’s a common response across Europe, Australia and the US. These are key findings from the ING International Survey Homes and Mortgages September 2018 report titled, “Are house prices too much of a stretch?” the seventh annual survey of consumer attitudes to the housing market across Europe and latterly Australia and the US.

Nafta: Is a handshake imminent?

Nafta negotiations are set to resume today between the US and Canada, with the aim of striking a deal by the end of the week. Time is running out to secure an agreement as an end-of-month deadline looms to present the text of the deal to Congress. We think a fudge is more likely than not, but will it come this week?

Although there’s an element of déjà vu here, Canada’s Foreign Affairs Minister, Chrystia Freeland, has agreed to meet Robert Lighthizer, the US Trade Representative, today, with the aim of keeping Canada in the agreement. US Congress, which is in favour of Nafta, is pushing for Canada to be kept in the trilateral agreement, and the pressure is on for a new deal to be signed before Mexican President Enrique Pena Nieto leaves office in December. However, these congressional pressures haven’t been sitting too well with President Trump, who has (quite directly) addressed Congress through tweets by saying, “Congress should not interfere w/ these negotiations or I will simply terminate Nafta entirely”. Thoughts differ on whether this should be taken at face value or is merely a negotiating tactic.

Trade & Tariffs - implications for the Fed

The intensifying trade war will impact both US inflation and growth. How will the Federal Reserve respond?

Trade tensions have been steadily escalating since the start of the year, culminating in the latest round of tariffs on $200bn of imports from China. The concern is that the situation could deteriorate further with China retaliation potentially opening the door to the Trump administration implementing tariffs on all Chinese imports. This is bad news for both growth and inflation.

Reading time around 9 minutes

In case you missed It: Trade tensions mount

The US stepped up its trade war with China this week, Britain's Brexit plan was rejected in Salzburg and another Nafta deadline came and went without a deal. We look at the implications for global markets. Plus, reflections on two rate decisions, musings on the Brazilian election and a special report on growing disillusion in Europe's housing market

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