Entries for 'EM Vulnerability'

US tariffs are exerting depreciation pressure on the RMB, which we think could ultimately drive $/CNY well above 7.00. One illustration of that depreciation pressure is a $/CNY rate now back in the upper (weaker) half of the band around the fix. Another visualization are large residuals in our fixing model, which point to policy makers keeping RMB temporarily strong.

Despite the shift in the Fed's stance, the Dollar has refused to fall versus the rest of the G10. One reason is that other central banks are also shifting dovish, which limits the scope for interest differentials. Another is that the importance of rate differentials as a driver of FX has fallen, such that the dovish Fed shift now carries less signal for the Dollar. The Dollar is “stuck,” a dilemma for policy makers who want a weaker currency.

Our global growth tracker has fallen to its lowest levels since 2015, driven by a sharp drop in manufacturing sentiment around the world. The evidence points to normal ups and downs in global manufacturing, with some early signs that hard-hit places like Germany are turning up.

We scan across EM for where – besides Turkey – growth is heavily credit dependent. Colombia, Russia, Indonesia, Brazil and Poland have growth heavily linked to credit.

The Fed has undertaken a remarkable dovish shift so far this year, which some believe has further to run given this year’s review of policy. From a global perspective, this dovish Fed shift is potentially destabilizing. If the Fed succeeds in running the economy hot, longer-term yields will rise, a downside risk to our already more cautious EM capital flow projections.

Last year’s sudden stop in the BoP gave rise to a severe credit crunch, cutting the current account deficit and reducing external vulnerability. But the credit expansion in Q1 of this year undid a lot of that progress. We see much of recent Lira weakness through this credit-focused lens. The way forward lies in shifting Turkey away from credit-led growth.

Another credit expansion has been underway during Q1 of this year, and again coincided with rising volatility in the $/TRY exchange rate. Volatile markets necessitate a shift away from credit-driven growth, to a new growth model with an emphasis on structural reforms.

We see global growth worries as overblown. US data are catching down with elsewhere, but that was inevitable and to be expected, a normal sign of global business cycle swings. We lower our growth forecasts modestly, but continue to see a solid overall picture.

Lesson #1: Don’t engineer an outsize credit boom into a global tightening cycle. Lesson #2: Current account-based estimates of FX fair value are really important. Lesson #3: After a decade of G-3 monetary easing, EM has a positioning overhang. Lesson #4: Imposing a tariff on China is a negative shock that weakens the RMB. Lesson #5: Don’t get hung up on stories the Fed is shifting hawkish. It isn’t.

EM Asian currencies have historically exhibited "fear of floating," with many countries using official intervention to stabilize exchange rates. W

Turkey over the summer experienced a large negative credit impulse, driven by the "sudden stop" in the balance of payments in early August. Exter

We compare FM to EM across key macroeconomic outcomes. FM grew less than EM in the long run but saw lower volatility. FM fell behind in convergence to

The Lira has fallen 30 percent in real terms in recent years, after trend depreciating in real terms for many years prior to that. We screen EM for

The recent Lira sell-off follows many years of trend depreciation, such that the currency is now materially undervalued in our models. Turkey's bal

We scanned EM for external vulnerability earlier this year, and found risk was the highest in Argentina and Turkey. We develop a companion toolkit

A central debate in markets continues to be whether the Dollar will rise or fall. This debate tends to brush over the fact that there are two versions

The recent RMB devaluation is raising fears a currency war is imminent. RMB declines have undone strength from early 2018, a natural up and down. But

The RMB had been on the sidelines of growing trade tensions, but its recent weakness is raising fears of competitive devaluation. We continue to th

We recently estimated an annual financing need around $15 bn for Argentina, on benign assumptions for the current account, debt rollover and capita

EMs with large external funding needs are under pressure. The Turkish Lira is one of the currencies in focus. We present external funding scenarios to