Big Moves, Important Levels
July 12, 2022
Read Time 2 MIN
EUR/USD Parity and EMFX
Watching the EUR/USD cross trying to break parity is absolutely mesmerizing, but this is not the only significant FX level that is (or maybe?) about to be breached (or already breached). The J.P. Morgan Emerging Market Currency Index1 is now trading below 50.0 (see chart below). The Hungarian forint moved above 400/euro. The South African rand is trading above 17.0/U.S. dollar for the first time since the pandemic (September 2020). The Chilean peso made a big move above 1,000 against the U.S. dollar this morning, pressured by the outlook for copper and the domestic policy agenda. Argentina’s alternative “blue chip” exchange rate breached the 300/U.S. dollar threshold, and the Romanian lei is “within walking distance” to 5.0/euro.
EMFX Flexibility – Policy and Market Responses
From the macroeconomic perspective, a weaker but more flexible exchange rate – especially when accompanied by credible rate hikes – is not such a bad thing. It acts as a shock-absorber (=no waste of international reserves on futile interventions), and paves the way for the eventual external adjustment. Note that the Chilean central bank refused to intervene on the FX market – despite a sizable depreciation move. However, FX weakness in the current environment can add to inflation pressures in emerging markets (EM), forcing central banks to extend tightening cycles – often at the expense of growth. The local swap curve, for example, is now pricing in an extra rate hike in Brazil. And, of course, from the market’s perspective, weaker EM FX added (a lot) to year-to-date losses in local debt (J.P. Morgan’s GBI-EM Index, USD unhedged).
Extending EM Tightening Cycles
Circling back to policy responses, Hungary raised its base rate by 200bps this morning, bringing it to the same level as the 1-week deposit rate (which was increased by the same amount last week). Hungary’s rate hikes’ “acceleration” is happening in sync with announced fiscal tightening, albeit the currency and the local bond market are yet to be convinced that policy adjustment is credible after a massive pre-election spending spree. Central banks in Chile and Korea will be meeting tomorrow, and both are expected to deliver 50bps rate hikes. In the case of Korea, this would be a welcome move (headline inflation is currently around 6%, and expected to drop to low single digits in H1-2023). In the case of Chile, the market might be disappointed by “mere” 50bps, considering it insufficiently hawkish against the backdrop of double-digit inflation. Stay tuned!
Chart at a Glance: EM FX – Crossing Important Levels
Source: Bloomberg LP
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.