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Emerging Markets Debt Daily
Turkey Rates – Final CountdownNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 18, 2020
Turkish President Erdogan reiterated that higher rates are detrimental - would the policy U-turn last? Thailand is the latest “EM Graduate” to express concerns about the currency strength.
Turkey’s rate-setting meeting is tomorrow, the consensus expects a 475bps hike, and President Tayyip Erdogan keeps talking… about negative consequences of high interest rates. The president cautioned that investors should not be crushed under high rates and that high rates are detrimental to production and exports. Comments like this suggest that Turkey’s latest policy turnaround might be short-lived. And while the central bank could be allowed to hike the benchmark rate tomorrow – quite possibly in line with the market expectations – we doubt that this will mark the beginning of genuine longer-lasting structural adjustment.
Thailand’s central bank stayed on hold today – as expected – but its comments about the currency show that there are two realities in the Emerging Markets (EM) FX world. Currencies with weaker fundamentals or those affected by the geopolitical noise are still below the pre-COVID levels. Currencies of “EM Graduates” – Thailand is among them – bounced back quickly (see chart below), and their strength creates policy challenges for central banks, because it weighs on the economic recovery (especially exports). Thailand is expected to announce measures to curb the currency’s strength in a few days.
South Africa’s consumption is recovering, but the pace remains sluggish. September’s sequential growth was around 1%, despite the removal of the COVID-related restrictions. On the bright side, the central bank’s latest comments suggest that the transmission mechanism is working as intended – especially as regards households – and that we should see stronger domestic activity in the coming months. This argues in favor of the central bank’s keeping its policy rate on hold tomorrow.
Chart at a Glance: EM FX - Not A Monolith
Source: VanEck Research; 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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