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
3 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
4 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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.
% %
Source: Thomson Reuters Datastream
-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)
5 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
Source: Thomson Reuters Datastream
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
6 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
Source: Thomson Reuters Datastream
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
Source: Thomson Reuters Datastream
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
7 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
Source: Thomson Reuters Datastream
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)
8 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
Source: Thomson Reuters Datastream
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
Source: Thomson Reuters Datastream
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
9 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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)
10 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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
11 Macro Weekly - EM: wobble or crisis? - 26 August 2013
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