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  • Emerging Markets Debt Daily

    EM Growth – Dollar Down, EM Up

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 05, 2020

    EM growth downgrades are over for now – the sizable stimulus and the weaker U.S. Dollar give a helping hand. Turkish rates and currency remain under pressure this morning, concerns about economic policies persist.

    Our strong conviction is that having a death-of-the-U.S. Dollar theory is neither a good theoretical nor a practical guide for EM active investing. Nonetheless, a weak U.S. Dollar is often associated with rising EM growth (and vice-versa - see chart below). So, while backward-looking GDP prints in EM look understandably horrifying (like today’s Q2 GDP contraction in Indonesia), a combination of the large-scale policy stimulus and the weaker “greenback” brightens the near-term outlook. This fact is already reflected in the consensus growth forecasts for 2020 – the downgrades appear to be over for now.

    Emerging markets are increasingly seeing the light at the end of the proverbial tunnel, and this helps to explain why many central banks are taking a pause or ending their rate-cutting cycles. Thailand’s central bank kept the benchmark rate on hold for the second month in a row at 0.5%, expecting a gradual recovery as the remaining restrictions are lifted. Brazil is widely expected to deliver the last 25bps rate cut later today. Brazil’s inflation outlook leaves room for additional easing, but the fiscal situation (2020 budget deficit is expected to exceed 15% of GDP) is a major argument for policy caution.  

    The morning brought no respite for Turkey’s currency and rates (the stock market is holding on there). The lira underperformed peers by a wide margin (down by 200bps vs. U.S. Dollar according to Bloomberg LP, as of 9am ET), local short rates are moving up, and the entire sovereign yield curve is under pressure. There will be no important data releases in Turkey for the rest of the week, and this leaves plenty of time to focus on the rapidly declining international reserves, large-scale currency interventions, and past policy mistakes that led to this unfortunate outcome.

    Chart at a Glance: Inverse Relation Between EM Growth and U.S. Dollar

    Chart at a Glance: Inverse Relation Between EM Growth and U.S. Dollar

    Source: Bloomberg LP


    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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