Speculative positioning in the CFTC’s CoT report shows Dollar longs have scaled back sharply and are only modest at this point. Data from option markets suggest positioning may even be modestly short the Dollar versus the Euro. After many years of large Dollar longs in the foreign exchange market, we read these data as saying Dollar positioning is now essentially flat.
We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.
Please find our latest U.S. Regulatory Update, covering the Federal Reserve’s Semiannual Monetary Policy Report, Congressional Libra Hearings, Stress Testing and CCAR results, and Capitol Hill updates, among other topics.
Following his testimony at the US Congressional hearings on Facebook’s proposed Libra digital currency, Professor Chris Brummer joins FRT to discuss the top takeaways and the potential implications for other initiatives in the digital currency landscape (with Brad Carr & Conan French)
Labor shortages and fragile investor confidence will constrain output growth. Policies will likely become more accommodative, thanks to a dovish ECB and Fed. The external financing and inflation outlook will remain challenging for some. Slow progress in addressing structural problems will intensify vulnerabilities.
The IIF has summarized key themes that emerged from the Facebook Libra hearings before both the Senate Banking Committee and the House Financial Services Committee this week in Washington.
Our EM Growth Tracker came in at 3.5% (3m/3m SAAR) in June, 0.3pp lower than the month prior. The deterioration in our tracker was mainly driven by weaker hard data (explaining more than half of the decline) but exacerbated by business surveys and financial variables.
Low rates may boost short-term growth—but will discourage deleveraging even as debt continues to pile up; Incoming EC President Ursula von der Leyen puts climate change and sustainable finance top of the policy agenda; LIBOR transition update: focus on risks for asset managers; Venezuela: estimated total debt of over 200% of GDP, with external debt accounting for 80% of total debt
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.
Growth differentials across EM are large. Asian EMs outperformed in the long-run, mostly due to higher productivity growth. Low productivity explains low growth, in Brazil, Mexico, and South Africa.
Spurred by falling interest rates, global debt rose by a hefty $3 trillion in Q1 2019. At over $246 trillion, global debt is now just $2 trillion shy of the all-time high of Q1 2018. EM debt hit a record $69 trillion in Q1 2019—over 216% of GDP.
Since the height of the Lira and Peso sell-off in August 2018, both currencies have weakened sharply in real effective terms. While both have seen their current account deficits narrow sharply, this is mostly due to cyclical weakness and not genuine rebalancing. This is why our FX fair value model signals that both the Lira and Peso are only fair and not undervalued.
Powell reaffirms dovish stance—but if stronger U.S. data derail cuts, could a bond market selloff be on the horizon?; Catch-22: central bank accommodation intended to support growth ends up hurting the financial sector; Over 17% of the EM USD corporate bond universe (ex-financials) have credit ratings on “negative outlook”; U.S. investors have growing exposure to climate risk via their cross-border investments—especially in equities; International investors shift into Chinese RMB bonds after index inclusion—foreign holdings now at a record $284 billion
Colombia's public debt has increased steadily. We assess the medium-term fiscal framework, which includes optimistic growth projections, relying heavily on improved tax collection. Debt will fall slowly in conservative scenarios.
Activity in China slowed significantly in mid-2018, but has been stable since September despite tariffs. A revival in credit-intensive sectors offset tariffs, which clearly affected export volumes to the US. Scope for policy support remains if growth falters.
Strong domestic spending has kept output above potential, intensifying inflation pressures. Weaker foreign demand should allow policies to remain accommodative in the near term. Labor shortages and reduced access to EU funds will be the main medium-term challenges.
The IIF has submitted a response to the FSB’s Call for Evidence. We urge the FSB to consider specific issues during its evaluation, including market fragmentary trends around the implementation of the TBTF reforms.