Is the rouble overhyped?
For many months now the Russian rouble has been everyone’s favourite currency. Thanks to all the interest it rose 4 percent against the dollar during the July-September quarter. How long can the love affair last?
It is easy to see why the rouble is in favour. The central bank last month raised interest rates to tame inflation and might do so again on Friday. The implied yield on 12-month rouble/dollar forwards is at 6 percent — among the highest in emerging markets. It has also been boosted by cash flowing into Russian local bond market, which is due to be liberalised in coming months. Above all, there is the oil price which usually gets a strong boost from Fed QE. So despite worries about world growth, Brent crude prices are above $110 a barrel. Analysts at Barclays are among those who like the rouble, predicting it to hit 30.5 per dollar by end-2012, up from current levels of 31.12.
All that sounds pretty bullish. But there are reasons why the rouble’s days of strength may be numbered. First the QE effect is unlikely to last. As we argued here, QE’s impact will be less strong than after the previous two rounds. Analysts at ING Bank point out that in 3-6 months after the launch of QE2 oil prices gained 40 percent, pushing the rouble up nearly 10%. This time oil won’t repeat the trend this time, and neither will the rouble, they say:
A chance for higher policy rates may support the rouble in the short-term, but we doubt it will steadily gain from these speculative carry-trade
Second, flows to the rouble-denominated OFZ bond market may be overhyped, ING says, noting that the finance ministry has cut 2013 borrowing forecasts by 30 percent. Capital flight, Russia’s old headache, continues unabated and is expected around $70 billion this year.
The longer-picture is most troubling. A major source of support for the rouble has been Russia’s current account surplus. But ING calculates this will more than halve in 2013 from this year’s expected levels around $80 billion — a consequence of lower oil prices and Russia’s WTO accession which will encourage imports. The central bank has gone a step further to concede Russia will actually swing into deficit by 2015. Unless Russia puts in big reform by then, it could be in trouble, says Capital Economics:
Iran currency plunge an omen for change?
In recent days Iranians all over the country have been rushing to dealers to change their rials into hard currency. The result has been a spectacular plunge in the rial which has lost a third of its value against the dollar in the past week. Traders in Teheran estimate in fact that it has lost two-thirds of its value since June 2011 as U.S and European economic sanctions bite hard into the country’s oil exports. The government blames the rout on speculators.
According to Charles Robertson at Renaissance Capital, the rial’s tumble to record lows and inflation running around 25 percent may be an indicator that Iran is moving towards regime change. Robertson reminds us of his report from back in March where he pointed out that autocratic countries with a falling per capita income are more likely to move towards democracy. (Click here for what we wrote on this topic at the time)
He says today:
Fed re-ignites currency war (or currency skirmish)
The currency war is back.
Since last week when the Fed started its third round of money-printing (QE3), policymakers in emerging markets have been busily talking down their own currencies or acting to curb their rise. These efforts may gather pace now that Japan has also increased its asset-buying programme, with expectations that the extra liquidity unleashed by developed central banks will eventually find its way into the developing world.
The alarm over rising currencies was reflected in an unusual verbal intervention this week by the Czech central bank, with governor Miroslav Singer hinting at more policy loosening ahead, possibly with the help of unconventional policy tools. Prague is not generally known for currency interventions — analysts at Societe Generale point out its last direct interventions were conducted as far back as 2001-2002. Even verbal intervention is quite rate — it last resorted to this on a concerted basis in 2009, SoGen notes. Singer’s words had a strong impact — the Czech crown fell almost 1 percent against the euro.
No policy easing this week in Turkey and Chile
More and more emerging central banks have been embarking on the policy easing path in recent weeks. But Chile and Turkey which hold rate-setting meetings this Thursday are not expected to emulate them. Both are expected to hold interest rates steady for now.
In Chile, the interest rate futures market is pricing in that the central bank will keep interest rates steady at 5 percent for the seventh month in a row. Most local analysts surveyed by Reuters share that view. Chile’s economy, like most of its emerging peers is slowing, hit by a potential slowdown in its copper exports to Asia but it is still expected at a solid 4.6 percent in the third quarter. Inflation is running at 2.5 percent, close to the lower end of the central bank’s percent target band.
Turkey is a bit more tricky. Here too, most analysts surveyed by Reuters expect no change to any of the central bank rates though some expect it to allow banks to hold more of their reserves in gold or hard currency. The Turkish policy rate has in fact become largely irrelevant as the central bank now tightens or loosens policy at will via daily liquidity auctions for banks. And for all its novelty, the policy appears to have worked — Turkey’s monstrous current account deficit has contracted sharply and data this week showed the June deficit was the smallest since last August. Inflation too is well off its double-digit highs.
Shadow over Shekel
Israel’s financial markets had a torrid time on Monday as swirling rumours of an imminent air strike on Iran caused investors to flee. The shekel lost 1.4 percent, the Tel Aviv stock exchange fell 1.5 percent and credit default swaps, reflecting the cost of insuring exposure to a credit, surged almost 10 percent.
There has been a modest recovery today as the rumour mills wind down. But analysts reckon more weakness lies ahead for the shekel which is not far off three-year lows. Political risks aside, the central bank has been cutting interest rates and is widely expected to take interest rates, currently at 2.25 percent, down to 1.75 percent by year-end. Societe Generale analysts are among the many recommending short shekel positions against the dollar. They say:
Expect the dovish stance of the Bank of Israel to remain well entrenched for now.
Norwegians piling into Korean bonds
One of the stories of this year has been the stupendous rally on emerging local currency debt, fuelled in part by inflows from institutional investors tired of their zero or negative-return investments in Western debt. Norway’s sovereign wealth fund said last week for instance that it was dumping some European bonds and spending more of its $600 billion war chest in emerging markets.
Quite a bit of that cash is going to South Korea. Regulators in Seoul recently reported a hefty rise in foreigners’ bond holdings (see here for the Reuters story) and Societe Generale has a note out dissecting the data, which shows that total foreign holdings of Korean bonds are now worth around $79 billion — back at levels seen last July. Norwegians emerged as the biggest buyers last month, picking up bonds worth 1.5 trillion won ($1.3 billion) , almost double what they purchased in the entire first half of 2012. Norway’s holdings of Korean Treasuries now total 2.29 trillion won, up from just 190 billion won at the end of 2011.
The growing interest from overseas investors would seem logical — South Korea stands on the cusp between emerging and developed markets, with sound policies, a current account surplus and huge currency reserves. And Socgen analyst Wee-Khoon Chong says the Norwegian crown’s recent strength against other currencies makes such overseas trades more attractive (the crown is up 6 percent versus the euro this year and has gained 5.3 percent to the Korean won). “Norwegians are the newbies into the KTB market,” Chong says. “They are probably recycling their FX reserves.”
Emerging corporate debt tips the scales
Time was when investing in emerging markets meant buying dollar bonds issued by developing countries’ governments.
How old fashioned. These days it’s more about emerging corporate bonds, if the emerging market gurus at JP Morgan are to be believed. According to them, the stock of debt from emerging market companies now exceeds that of dollar bonds issued by emerging governments for the first time ever.
JP Morgan, which runs the most widely used emerging debt indices, says its main EM corporate bond benchmark, the CEMBI Broad, now lists $469 billion in corporate bonds. That compares to $463 billion benchmarked to its main sovereign dollar bond index, the EMBI Global. In fact, the entire corporate debt market (if one also considers debt that is not eligible for the CEMBI) is now worth $974 billion, very close to the magic $1 trillion mark. Back in 2006, the figure was at$340 billion. JPM says:
Aussie: reserve managers’ new favourite
Lucky Australia. In a world of slowing economic growth its central bank today raised forecasts for 2012 GDP growth by a half point to 3.5 percent. That’s down to a mining boom, driven of course by China. But there’s a downside. Australia’s currency, the dollar (or affectionately, the Aussie), has steadily risen in recent years, and is up 3 percent versus the U.S. dollar this year. Unsurprisingly, the Reserve Bank of Australia tempered its good news on growth with a warning over the Aussie’s gains.
Analysts at Credit Agricole note that the Aussie’s gains this year have come in tandem with a rise in Japan’s yen. That in itself would have been highly unusual in the past: the yen is a so-called safe haven, the currency investors run to when all else is selling off, while the Aussie is a commodity currency, one that does well when world growth is looking good and risk appetite is high. CA analysts explain thus:
The role of the (Aussie) is probably changing from a traditional commodity currency to an increasingly attractive reserve currency.
India, a hawk among central bank doves
So India has not joined emerging central banks’ rate-cutting spree . After recent rate cuts in Brazil, South Korea, South Africa, Philippines and Colombia, and others signalling their worries over the state of economic growth, hawks are in short supply among the world’s increasingly dovish central banks. But the Reserve Bank of India is one.
With GDP growth slowing to 10-year lows, the RBI would dearly love to follow other central banks in cutting rates. But its pointed warning on inflation on the eve of today’s policy meeting practically sealed the meeting’s outcome. Interest rates have duly been kept on hold, though in a nod to the tough conditions, the RBI did ease banks’ statutory liquidity ratio. The move will free up some more cash for lending.
What is more significant is that the RBI has revised up its inflation forecast for the coming year by half a percentage point, and in a post-meeting statement said rate cuts at this stage would do little to boost flagging growth. That, to many analysts, is a signal the bank will provide little monetary accommodation in coming months. and may force markets to pedal back on their expectation of 100 basis points of rate cuts in the next 12 months. Anubhuti Sahay at Standard Chartered in Mumbai says:
Mrs Watanabe in Istanbul
Japanese mom-and-pop investors’ penchant for seeking high-yield investments overseas is well known. Mrs Watanabe (as the canny player of currency and exchange rate arbitrage has come to be known) invests billions of yen overseas every year via so-called uridashi bonds, debt denominated in currencies with high yields. Data shows the lira has suddenly become the red-hot favourite with uridashi investors this year.
In a note entitled Welcome Mrs Watanabe, Barclays analysts estimate $2 billion in lira-based uridashi issuance this year, ahead of old favourite, the Australian dollar.
