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Emerging Markets Debt Daily
China – Strong Yuan SupportNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 06, 2020
The fundamental support for the Chinese currency remains strong. Brazil inflation is edging higher, and there are some developments that should be watched carefully.
China posted another large current account surplus in Q3 (USD94.2B – see chart below), signaling that the fundamental support for the currency remains strong. The improving current account is only one part of the story though. China’s improving growth differentials and lower inflation, as well as stronger inflows are sending a similar message. In particular, China’s inclusion in major global bond indices (including the FTSE-Russell WGBI), can create additional demand for Fixed Income products. Some estimates suggest the WGBI inclusion alone that this can attract up to USD120B over time.
Brazil’s headline inflation is grinding higher (3.92% year-on-year in October), but it looks like transitory factors are the most likely culprits. The COVID restrictions are lifted, the economy is opening up, there is a lot of pent-up demand, which creates localized price pressures (such as 13.88% year-on-year jump in food and beverage prices). There are some developments we are watching carefully though. The diffusion rate for inflation moved above 50% (63.4), and Brazil’s M2 growth is quite high (around 30% year-on-year in September). So, there are very few arguments in favor of additional monetary easing.
It feels like the risk-on-sentiment is taking a pause today, but two currencies – the Russian ruble and the Turkish lira – are under more pressure than peers. The ruble was moved by reports suggesting that President Putin might retire next year (mysterious health issues). The lira’s troubles are more fundamental, including the quality of growth and a lack of external adjustment. The consensus view is that the central bank should send a stronger signal by raising its benchmark policy rate (in addition to “backdoor” tightening via the average cost of funding).
Chart at a Glance: China Current Account Surplus – Another Strong Reading
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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