Emerging Markets

CEE: Good news for PLN, not that much for CZK

Yesterday's US inflation numbers moved the central and eastern European currencies as well as the entire emerging market space. Obviously, a higher EUR/USD is good news for the region, but it seems the move was too much, and we may see some corrections today. Poland's zloty benefited the most from the move yesterday, briefly touching 4.40 EUR/PLN, the lowest since July. Core rates moved PLN rates down too but we would expect some rebound here given the tone of the National Bank of Poland. Therefore, we expect the smallest correction in the region and EUR/PLN should hold in the 4.40-4.42 range.

On the other hand, in the Czech Republic, the market does not seem so mispriced as far as monetary policy is concerned and unlike Poland, yesterday's trading already showed a weaker interest rate differential, negative for the koruna. Thus, we think we will see EUR/CZK above 24.500.

FX Daily: Upbeat China PMIs lift the mood

The 20th Party Congress Is More Important For China Than Publishing Data

ING Economics ING Economics 18.10.2022 11:00
China's 20th Party Congress remains in focus - delays to data  In this article Macro outlook What to look out for: RBA minutes and China's Communist Party Congress Source: shutterstock Macro outlook Global markets: US stocks erased their losses from Friday’s session, opening higher and then trading quite flat until the close. The S&P500 rose 2.65% and the NASDAQ was up 3.43%. Falling bond yields may have helped restore some confidence, and this may have been helped by tailwinds from the UK Gilts market, where new Chancellor, Jeremy Hunt, took an axe to the previous mini-budget and put the UK’s finances on a sounder footing. 30Y UK Gilt yields fell 40.2bp, the 10Y dropped 35.7bp and 2Y Gilt yields declined by 33.3bp. 10Y European government bond yields declined by about 8bp on average, while the 10Y US Treasury yield was down just 0.8bp. Equity futures suggest that the positive tone will persist into today’s trading, and this could help lift the EUR further. EURUSD rose to 0.9843 yesterday from about 0.972 and could be buoyed further if risk sentiment holds up. The AUD is trading just below 63 cents, after touching 0.6189 briefly yesterday. Cable has recovered all the way to 1.1356, though it looked as if it might hit 1.145 at one point yesterday. But the JPY seems to be looking at further weakness, missing out on the G-10 rallies, and edging ever closer to 150. The BoJ will be getting anxious after their recent jawboning seems to have fallen on deaf ears.  Asian FX has lagged behind the G-10 rally, and will likely pick up the slack today. Yesterday, the VND was the weakest of the Asia pack, dropping as the central bank widened the trading band to 5% (from 3%) on either side of the fixing rate. G-7 Macro: It is very quiet on the G-7 calendar today. Germany’s ZEW business survey is probably the main pick of the day. The expectations component of the survey is not far above the Global Financial Crisis low of -63.9, and could well push below that today. The consensus expects it to fall to -66.5. China: There are some delays to the economic data scheduled for release during the Party Congress. These include the customs export and import numbers, which were scheduled for release yesterday, as well as GDP, retail sales, industrial production, and fixed asset investment, which were previously scheduled for release today. We aren't concerned that the release in the data is because it is particularly weak. Although we don’t expect it to paint a particularly positive picture of the Chinese economy when it is eventually released. Rather, the delay suggests that the government believes that the 20th Party Congress is the most important thing happening in China right now and would like to avoid other information flows that could create mixed messages.   What to look out for: RBA minutes and China's Communist Party Congress New Zealand inflation (18 October) Australia RBA minutes (18 October) China GDP and activity data (18-31 October) US industrial production (18 October) Malaysia trade balance (19 October) US building permits and housing starts (19 October) Fed’s Bostic and Kashkari speak (19 October) Japan trade balance (20 October) Australia labour market data (20 October) China loan prime rate (20 October) Taiwan export orders (20 October) Bank Indonesia policy meeting (20 October) US initial jobless claims (20 October) Fed’s Evans, Bullard and Kashkari speak (20 October) New Zealand trade balance (21 October) Japan CPI inflation (21 October) South Korea advance trade data (21 October) Fed’s Jeferson, Cook and Bowman speak (21 October) TagsEmerging Markets Asia Pacific Asia Markets Asia Economics   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
B2Broker Announces Support for NFDs, Reduces Margin Requirements on Crypto CFD Pairs, and Enhances Liquidity Packages

B2Broker Announces Support for NFDs, Reduces Margin Requirements on Crypto CFD Pairs, and Enhances Liquidity Packages

B2Brokers Group of Companies B2Brokers Group of Companies 19.06.2023 12:09
B2Broker is continuing to broaden its suite of liquidity services and solutions for the Forex and crypto markets with the addition of Non-Deliverable Forwards (NDFs). This new offering gives businesses an even wider variety of asset options as well as more effective risk management capabilities.   B2Broker delivers liquidity in all major asset classes with this launch. The company's liquidity now covers the following: Rolling Spot FX & Precious Metals Equity Indices Energies Commodities Crypto Derivatives/CFDs Single Stocks/CFDs ETFs NDFs    With the new expansion of services, B2Broker is firmly positioned to lead the industry in its commitment to meeting the needs of all its clients' liquidity requirements.   What are NDFs? NDFs are financial instruments used for hedging against the risk associated with currency exchange rate fluctuation. Through an NDF, both parties in a transaction agree on an exchange rate for their desired currencies before the actual transfer takes place. The difference between the agreed rate and the prevailing market exchange rate is settled in cash at a later date.  NDFs are useful for companies to manage risk in developing countries where it may not be possible or practical to use local currency forwards. It is a cost-effective way of hedging against possible losses from international business deals.   NDFs Supported by B2Broker B2Broker now gives their clients access to a wide variety of NDF currencies, giving them the option of hedging currency risk in a broad range of emerging markets. B2Broker's NFD currency pairs include: USD/BRL USD/CLP USD/COP USD/IDR USD/INR USD/KRW USD/TWD   Benefits of B2Broker's Liquidity Offer B2Broker has structured NDFs as Contracts For Difference (CFDs), providing clients with remarkable flexibility and convenience. While conventional NDFs typically have a settlement period of T+30, B2Broker clients can seamlessly receive their settlements on the next business day as CFD contracts. This advancement eliminates client settlement risks and expedites the process, ensuring efficiency and peace of mind. B2Broker provides its clients with highly competitive commission rates, focusing on delivering superior service to both institutional and retail brokers.     B2Broker Lowers Margin Requirements on 10 Crypto CFDs B2Broker has halved the margin requirement on selected Crypto CFD pairs, lowering it from 20% to 10%: BNB/USD DSH/USD TRX/USD XMR/USD ZEC/USD SOL/USD DOT/USD LNK/USD AVA/USD ATM/USD   Updated Prime of Prime Institutional Liquidity Offer B2Broker has enhanced its PoP institutional liquidity packages by adding Prime Margin Account connections such as OneZero, PrimeXM, and Centroid. Clients can enjoy the benefits of an STP / DMA (A book) trading ecosystem with precise market execution and full transparency, all while benefiting from monthly minimum liquidity fees against traded volume. Moreover, B2Broker ensures a seamless onboarding process, setting up the Prime Margin Account free of charge and also providing 24/7 technical support to ensure that the brokerage operation runs smoothly at all times.     About B2Broker B2Broker is the premier provider of technology and liquidity for brokerages and exchanges. With its suite of services, B2Broker gives clients access to 800+ trading instruments across 8 asset classes, empowering businesses with effective liquidity capabilities to offer traders favorable conditions and top-tier execution. B2Broker is committed to staying ahead of the curve and continually updating its products and offerings in order to provide its customers with the best possible solutions.
GBP: Monitoring Data Outliers Amid Hawkish BoE Expectations

Central Banks Take Center Stage: Rate Hike Debates and Emerging Market Currencies Impact FX Market

ING Economics ING Economics 22.06.2023 09:29
FX Daily: 25, 50 and 1150bp rate hikes on the table today It is a big day for central bank policy meetings around the world. In the G10 space, the debate over whether policy rates get hiked 25 or 50bp is very much alive in the UK, Norway and to a lesser degree Switzerland. And there is much focus on the return of conventional policy and large rate hikes in Turkey. More hawkish policy overseas can keep the dollar offered.   USD: Rest of World catch-up with Fed sends dollar offered Price action in the FX space suggests investors are losing interest in the strong dollar story and are minded to seek out opportunities overseas. The return of portfolio flows to emerging markets is normally a slightly negative one for the dollar and can perhaps explain recent price action where the dollar is slightly offered even though US rates are at their highs and the US yield curve is steeply inverted.  Two such emerging market opportunities are Turkey (which we discuss below) and Brazil. Here, the central bank is resolutely keeping the policy rate at 13.75% (even though CPI is at 4%) and awaiting for longer-term inflation expectations to converge to target. Given that investors are giving Brazil's fiscal policy (long Brazil's Achilles heel) the benefit of the doubt, money looks to be flowing into the Brazilian real and driving one-month implied yields down to 10.88% from 12.50%. Spot USD/BRL looks as if it can drop to the 4.50 area. The only place where the strong dollar story is playing out is in USD/JPY, where a resolutely dovish Bank of Japan means that USD/JPY will be at the forefront of any dollar rally on the back of strong US data. On the calendar today is the second set of congressional testimony from Federal Reserve Chair Jerome Powell, existing home sales and weekly jobless claims. The recent rise in jobless claims is starting to gain some attention and any surprise rise today could knock 0.5% off the dollar. Given lots of rate rises in Europe today and some interest in emerging market currencies, we can see DXY staying gently offered. 101.50/60 would be the next target for DXY on the break of 102.00.
Unveiling the Hidden Giant: The Growing Dominance of Non-Bank Financial Institutions

Unveiling the Hidden Giant: The Growing Dominance of Non-Bank Financial Institutions

ING Economics ING Economics 29.06.2023 13:34
The irony of the financial system’s largest ‘known unknown’ Regulation helped Non-Bank Financial Institutions surpass banks in size. They are an increasingly important competitor, source of funding and client to banks. But their vulnerability and lack of transparency create the largest "known unknown" risk for the banking sector. Regulation will take time. Meanwhile, central banks may be forced to help out.   Why you should know about NBFIs Non-Bank Financial Intermediaries (NBFIs) have grown significantly since 2008 and as a result, the sector's influence has come under increasing scrutiny. Last year's UK gilt crisis was another wake-up call for regulators, with concerns rising over the growing vulnerabilities. Regulators across the globe are now asking for more and stricter regulation of these activities. In contrast to NBFIs, banks have seen stricter regulation since the global financial crisis, leaving room for NBFIs to develop. However, in the face of the increasing complexity and interconnectedness of the sector, a severe shock to NBFIs could spread to banks, creating a new type of risk for the traditional banking sector.   NBFIs have many faces, including ones that can look like a bank The term NBFI is used to describe a large variety of institutions. We are classifying them all as non-banks that take in cash and use it to generate a return. Most NBFIs take in cash, just as banks do, and deploy it in various securities and derivatives. The Financial Stability Board (FSB) monitors NBFI activity and divides the sector in two: NBFIs not engaging in credit intermediation nor bank-like activities (about 75% of the sector). All the entities which have bank-like activities, also called the “narrow measure”, where Money Market Funds and Fixed Income Funds make up the largest part (for other economic functions, see annex). Another way of looking at NBFIs is simply by dividing them into the main components such as: Insurance Corporations (ICs) Pension Funds (PFs) Other Financial Institutions (OFIs), such as Investment Funds and Money Market Funds Financial Auxiliaries (FAs), such as insurance brokers and captive financial institutions.   Fast growth made NBFIs much larger than the banking sector The stricter capital and liquidity requirements on banks put in place after the global financial crisis - notably through the implementation of Basel III - made some parts of lending less attractive for the banking sector. NBFIs were already present before 2008 but stepped in to take over portions of this business as regulatory requirements grew for banks. The IMF highlights that NBFIs have become a crucial driver of global capital flows for emerging markets and developing economies. Looking into the different NBFI components and sampling 21 major global economies and the euro area (list of countries in the annexes), the FSB reported strong growth for the sector in 2021, at 8.9% year-on-year. This is a significant development as the sector has seen average growth of just 6.6% over the last five years.   The NBFI sector has grown in every component since 2019 to reach $239.5tn
Escalating Russia-Ukraine Tensions Amplify Oil Supply Risks: The Commodities Feed

FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
Escalating Russia-Ukraine Tensions Amplify Oil Supply Risks: The Commodities Feed

FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials - 24.07.2023

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
Challenges to USD Dominance: BRICS, Emerging Markets, and Geopolitical Dynamics

Challenges to USD Dominance: BRICS, Emerging Markets, and Geopolitical Dynamics

ING Economics ING Economics 17.08.2023 09:29
Despite some pressure, the USD remains the preferential currency for trade. A greater role of BRICS and other emerging markets in global trade may create more natural demand for alternatives to USD, but this has not happened so far. The higher share of CNY in trade invoicing doesn’t seem to be dethroning USD, but rather pushing out second tier developed market FX, such as GBP. One direction in which USD could be challenged given the geopolitical confrontation is the higher focus of BRICS trade on other emerging market economies. Another area of focus might be the oil market, however BRICS’ share of this market so far is not overwhelming, and the fuel trade overall accounts for a small fraction of the global trade.   One strategy to wean the world off the dollar has been to challenge its international role in trade invoicing. China is the flagship example of this strategy. Since 2009, the People’s Bank of China has been promoting CNY through establishing bilateral swap lines with various central banks (Figure 3). By 2023, the number of those agreements reached almost 40, the total sums available at RMB 4tr (only 2% of it is currently tapped) with around 50% of the sums with China’s Asian partners and neighbours. Amid those measures, the role of CNY in global international reserves increased from virtually zero to 2.6% in 2022, while the share of CNY transactions in SWIFT (an indirect measure of invoicing) doubled to 2.3%.   In parallel, China has been developing its own RMBbased payment system CIPS, its alternative to SWIFT (Figure 4), which has been steadily growing since its inception in 2015 and currently has 91 direct and over a thousand indirect participants worldwide. Meanwhile, one should note that as of March 2022, the Western financial messaging/clearing systems SWIFT/CHIPS had 10X the participants of CIPS and 40X the transactions, likely making the SWIFT picture more representative of the global reality.     It is also worth considering the structure of global trade and the role of dominant currencies per bloc. Based on the structure of global imports (exports would look similar), the geography seems sticky, with roughly one third attributable to the US and EU, another third to China and the rest of Asia, and another third represented by emerging America, Middle East, Central Asia, and Africa (Figure 5). The recent developments include a slight 1pp increase in the share of emerging market countries at the expense of the EU, likely reflecting near-shoring.  
De-dollarisation on the Asset Side: Central Bank Reserves and Global Dynamics

De-dollarisation on the Asset Side: Central Bank Reserves and Global Dynamics

ING Economics ING Economics 17.08.2023 09:34
On the asset side, de-dollarisation is seen mainly in the central banks’ international reserves, as the dollar is being pushed out by a variety of currencies including the CNY. At the same time, most of this de-dollarisation took place in the environment of zero interest rates. Given the recent normalisation of monetary policy in the US, the prospects of further de-dollarisation remain to be seen, and in 1Q23 the USD share in allocated reserves went up slightly. For the global private sector, the USD seems to remain just as attractive an international asset, especially in the nonfinancial sector.   Looking at the most tracked IMF COFER data, USD seems to be steadily losing ground as a reserve currency, even adjusted for FX rate movements (Figure 15). In 2022, the pace of de-dollarisation accelerated, and USD holdings were reduced in absolute terms for the first time. However in 2023, that process did not continue and may now be facing obstacles in the form of higher return on USD amid 5%+ Federal Reserve interest rates. One argument partially explaining the drop in the dollar’s share in 2022 could have been the strong dollar prompting heavy FX intervention sales in emerging markets to protect local currencies.   For example, Chile spent about half of its FX reserves defending the peso. This could have meant that the dollar’s share in reserves briefly fell below benchmarks. Looking at the long-term developments, the USD seems to be replaced (Figure 16) mostly by Asian currencies, namely CNY and JPY, but also with European currencies, except CHF. The most noticeable progress is seen in CNY as its share went up from zero in 2015 to 2.6% as of 1Q23. For reference, the renminbi was formally included in the SDR basket in late 2015.     In addition to the structure of FX reserves discussed above, diversification towards gold is often mentioned by the de-dollarisation watchers. The popularity of this topic seems to be growing as gold is more insulated against financial sanctions. Looking at the data (Figures 17 and 18) however, one can see that despite the increase in physical gold in FX reserves in 2014 and 2022 (coinciding with the rounds of Russia’s geopolitical challenges), the overall share of gold in global central bank reserves has increased only modestly and mostly thanks to the increase in its price.  
Exploring Currency Challenges in International Bond Issuance: The Case of USD vs. Emerging Trends

Exploring Currency Challenges in International Bond Issuance: The Case of USD vs. Emerging Trends

ING Economics ING Economics 17.08.2023 09:42
When looking at the potential challengers for USD bond issuance, ‘Panda’ bonds (issued in CNY, on the domestic mainland China market by foreign entities) have been discussed a lot in the media, but the volumes involved have been relatively small so far, especially when drilling down into true foreign entities (i.e., excluding offshore units of Chinese companies).   Annual volumes in recent years have been a few billion dollars. Of note, there has been some supranational issuance, including from the BRICS New Development Bank, along with some issuance from European financials and auto companies. In the EM space, there have been some small deals for Hungary, Poland, the Philippines, Sharjah (UAE) and South Korea. The market for ‘Dim Sum’ issuance (issued in renminbi, offshore in Hong Kong) is more developed, but again volumes have been relatively low, especially when excluding Hong Kong and China entities. A relative lack of liquidity and lingering investor concerns over potential capital controls may be inhibiting the growth of the market. In this respect it seems the renminbi has not yet registered in most investors’ consciousness for bond issuance. One area within emerging markets where we can see some signs of ‘de-dollarisation’ over the past decade or so has been where governments are attempting to avoid the ‘original sin’ of issuing too much debt in foreign currencies (Figures 27 and 28). As capital markets and economies have developed, many emerging market sovereigns have been able to fund much more of their borrowing needs via issuing domestic, local currency debt      
Positive Start Expected as Nvidia's Strong Performance Boosts Market Confidence

BRICS Summit Focuses on Bolstering Trade and Currency Cooperation Amid Yuan's Weakening

Kenny Fisher Kenny Fisher 23.08.2023 11:05
Xi meets Ramaphosa and discuss how to bolster trade in their own currencies Yuan still weakens despite PBOC’s most forceful fixing on record BRICS might lead to more investment in Africa, potentially bolstering rand   The annual BRICS Summit begins in Johannesburg with China’s President Xi meeting South African President Ramaphosa.  China and India have enjoyed 25 years of diplomatic ties and are looking to bolster trade and investment with more countries.  The three-day summit will be attended by leaders of China, India, Brazil and South Africa, as well as 30 African leaders. Russian President Putin will be participating via video conference as he has an international arrest over alleged war crimes in Ukraine.  Russian Foreign Minister Lavrov will represent Russia at the summit. BRIC nations make up a quarter of the global economy, so their voice will clearly be listened to, especially if they expand.  So far, 22 other countries have formally applied to join the bloc, but it seems difficult for the institution given they do not have a BRICS currency that can challenge the dollar.  The current members have lots of challenges to go all-in with de-dollarization and embrace a BRICS currency.  India does not want a China-led initiative. Given all the sanctions Russia is facing, they have billions of rupees that are stranded. There is no easy solution that can address all the problems facing the key members, which means they will take small steps, which include expanding use of a development bank to help with lending.   5-year USD/CNH, USD/INR, and USD/BRL The 5-five year chart above shows how robust the dollar has been against the yuan and rupee in 2023, with Brazil and their attractive interest differential being the one standout.  Alternatives to the dollar in trade will grow, but for now the big risk is the great refinancing that will occur over the next year could lead to extreme turmoil for emerging markets and that might keep the dollar supported against most of the BRIC currencies. The weekly USD/CNH and USD/INR chart below exemplifies how overbought this dollar trade has become.  There is a lot of macro risk on the table this week and FX markets could see either a strong extension of dollar strength or a major pullback.    
ECB Remains Cautious on Inflation, Italian Spreads Recover on Successful Retail Bond Sale

BRICS Expands: A New League of Major Oil Producers Emerges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.08.2023 09:21
A few more BRICS By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   BRICS – which includes the world's major energy-hungry nations like China and India, invited five countries - which happen to be the world's top oil producers Saudi Araba, Iran, UAE, Egypt and Argentina - to join the bloc. This means that the world's biggest oil producers and consumers will be forming a league within which – they are not necessarily willing to invent a gold-backed common currency – but where they will certainly be willing to settle their trades in terms of member-state currencies. The Chinese yuan could be a good candidate, the Indian rupee could be another alternative, or why not, the Russian ruble could also do the trick.   This is an important step towards weakening the petro-dollar, which is the outcome of an agreement back in the 1970s between Nixon administration and Saudi Arabia to trade oil exclusively in dollars in exchange for security guarantees from the US. Since then, OPEC has been selling its oil in USD terms. If we shift towards a new world order where oil and energy are no more traded in US dollars, that would be a major blow to the dollar as base and reserve currency, and that could also have major implications for the US economy's exploding debt that the rest of the world would not want to finance anymore, and the risk-free-ness of the US treasury.   But we won't reach that point tomorrow. First, China and India should end the conflict at their border. Second, a political alignment of EM countries with China and Russia is less evident than it sounds. India, for example, is not willing to make the US an enemy. PM Modi is the first foreign minister to address the US congress twice in the history of the United States, and many investments that leave China go to India.   But something is cooking in the EM kitchen and it's worth watching.   
ECB Signals Rate Hike as ARM Goes Public: Market Insights

Food Prices: Climate Volatility, Protectionism, and Fiscal Dynamics

ING Economics ING Economics 30.08.2023 13:20
Food prices Food inflation has started to ease sharply across the developed world, but this is another potential source of risk over the coming decade. Last year showed the cross-dependency of food prices on energy costs, and the ongoing risks associated with the Ukraine war and grain exports. But climate change is also creating increasingly volatile harvests, and the risk is that this results in more protectionism as producing nations seek to protect domestic supply. India’s recent bans on rice exports, and occasional threats of palm oil bans from Indonesia, highlight the risks here. This is a bigger threat to emerging markets, where food can exceed 50% of inflation baskets.   Fiscal support Huge government deficits in the 1970s may not have caused the initial inflation spike, but they undoubtedly amplified it. So, too, did the massive interventions at the start of the Covid pandemic and the “excess savings” pile they helped create. That story is now clearly changing. The US fiscal position is tightening and in the short term, a resumption of student loan repayments is symptomatic of Congress’ reluctance to allow further big spending packages. In the EU, the Stability and Growth Pact – the rules that mandate fiscal responsibility by European governments – is coming back to the fore. As we wrote a few months back, there’s a growing recognition that the rules need to be more flexible, especially when it comes to public investment. However, political uncertainty in the Netherlands and Spain could undermine an agreement on the new rules. In this scenario, and in the absence of yet another activation of the escape clause, eurozone fiscal policies would become more restrictive.  That said, after a decade of austerity and ultra-low interest rates, particularly in Europe, the lesson from both the pandemic and the Ukraine War is that fiscal policy can be a powerful lever. Met with a fresh, unexpected shock, we suspect the bar to another large fiscal intervention is lower than it might have been in the 2010s.
Turbulent FX Markets: Peso Strength, Renminbi Weakness, and Dollar's Delicate Balance

Turbulent FX Markets: Peso Strength, Renminbi Weakness, and Dollar's Delicate Balance

ING Economics ING Economics 01.09.2023 10:28
FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.
Bank of England: Falling Corporate Price Expectations May Signal Peak in Rate Hike Cycle

MXN Outlook: Banxico's View on a Strong Peso Sparks USD/MXN Rally

ING Economics ING Economics 01.09.2023 10:56
MXN: Banxico expressing a view over a strong peso Unlike Chinese authorities which are battling renminbi weakness and cut the FX deposit required reserve ratio last night, Mexican authorities are seemingly expressing a view that the peso is too strong. Here USD/MXN spiked more than 2% last night after Banxico announced that it would allow its "hedge book" or short USD/MXN position in the FX forward market to roll off rather than be extended.  By way of background, Banxico has intervened to support the peso during two periods (February 2017 and March 2020) and has done this by auctioning dollars through the FX forward markets using one-month to 12-month tenors. The total size of those positions is now around $7.5bn. Banxico announced yesterday that it would allow this position to roll off gradually, effectively over the next 12 months. Investors have read this as Banxico expressing a view that the peso has come far enough. And given the peso has been a prime beneficiary of the carry trade, we should not underestimate the risk of a further correction higher in USD/MXN ahead of this long US weekend. Yet USD/MXN has traded below 17.00 for very good reasons, including high carry and nearshoring trends. And given our view that the dollar does turn lower next year, we see the Banxico move as slowing rather than reversing the USD/MXN trend. Two further quick points: returns on the MXN carry trade may now come more from carry than nominal MXN appreciation, and speculation may grow in the TIIE market (Mexican swap curve) that Banxico may prefer early rate cuts after all if it does not want its currency to strengthen much more.
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Don't Panic: Mexican Peso Correction Following Banxico's Move to Unwind Dollar Position

ING Economics ING Economics 04.09.2023 10:37
Mexican peso corrects: Don't panic! USD/MXN has spiked higher on news that Banxico wants to start unwinding its short dollar position acquired through FX intervention. While the market may be correct in thinking that Banxico does not want the peso to be a lot stronger, we think that after some temporary weakness in September, the peso will still outperform its steep forward curve. Unwinding the intervention Late yesterday, Mexico’s central bank, Banxico, announced its plans to unwind the outstanding balances of its FX hedging programme, a programme launched in February 2017 to support the beleaguered peso. During two intervention episodes - February 2017 and March 2020 - Banxico effectively acquired short USD/MXN positions in the FX forwards market when spot was trading over 20 and 24, respectively. In its press release, Banxico clarified that $5.5bn of its forward position was built during 2017 and another near $2bn during the March 2020 episode to leave the current outstanding balance near $7.5bn. Banxico has said that it will let these short USD/MXN positions in the forward market (held in the one to twelve-month tenors) roll off gradually. In practice, this means rolling only 50%, not 100%, of the shorter-dated positions and allowing the longer nine and twelve-month positions to mature on schedule.   There are probably three reasons why USD/MXN spiked so sharply on the news. The first is that the Mexican peso has been investors' EM darling this year and that long MXN positions are crowded. The second is that Banxico’s decision to unwind this hedge programme could mean Banxico’s tolerance of peso strength has reached some kind of limit. The third is the technical aspect that the biggest impact on the FX market could come this month. If, as Banxico says, only 50% of this month’s reported $4.8bn in maturing forwards is rolled, that means the FX market has to absorb the sizeable impact of a $2.4bn Banxico dollar offer disappearing. While all of the above concerns have merit, we are less concerned than some and take Banxico’s press release at face value. In it, Banxico said it was now unwinding these positions because market conditions are now orderly and liquidity conditions are good (they weren’t when the intervention took place). And that, by unwinding these positions now, Banxico allows banks on the other side of these trades to do so in an orderly manner.
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The Resilient Peso: A Closer Look at Mexico's Currency Strength Amidst Unwinding Hedges

ING Economics ING Economics 04.09.2023 10:39
Peso positives remain in place Physically it looks like the majority of this hedge unwind will hit the USD/MXN market in September. However, the hedge unwind does nothing to reduce one of the key driving factors of peso strength this year – which is the risk-adjusted carry. Even Banxico in its meeting minutes highlights how the risk-adjusted yield is the dominant force in driving the peso. As we highlight below, the peso offers the higher carry-to-risk ratio in the EM space. This is the nominal implied yield available through the deliverable/non-deliverable FX forward market, adjusted by implied volatility from the FX options market. Unless Banxico plans to slash nominal rates or engineer some local factor that would command significantly higher implied volatility for USD/MXN, then this carry-to-risk ratio will remain a major boon to the peso.   EM currencies 'carry-to-risk' ratio and YTD performance versus USD   On the subject of potential rate cuts, it was noticeable that the Mexican TIIE swap curve barely budged on this announcement. If the FX market thinks Banxico may potentially even want to cut rates to put a floor under USD/MXN, the rates market is not buying the story. And Banxico this week has, in fact, said it will not be rushed into early rate cuts. Recall that Banxico had kept policy rates 600bp+ over the Fed to keep USD/MXN stable. We would be more worried for the peso if Banxico did threaten large, early rate cuts. New FX policies from central banks?     We tend to view this as more a commercial and financial stability-led decision from Banxico rather than a formal red flag to further peso strength. As an aside, Brazil’s central bank – the BCB – has a $100bn short USD/BRL position through the FX forwards following intervention and probably would not go near unwinding it for fear of crashing the Brazilian real. Chile’s central bank happens to be buying FX at the moment – but that looks a function of financial stability as it tries to rebuild FX reserves after losing half of them last year. In short, we do not think Banxico’s move is part of an effort to cap the strength in Latin currencies. Instead, we think Mexico’s high carry, decent growth, strong sovereign position and positioning for geo-political nearshoring should mean strong demand for the peso on any weakness this month. Additionally, foreign positioning in Mexcio’s local currency MBONO bond market is not particularly extreme; Mexico should be well positioned to receive funds when bond markets eventually come back into favour given its large 10% weight in the JPM GBI-EM local currency bond index. We currently forecast USD/MXN trading down through 16.50 next year when the broad dollar turns lower on a larger-than-expected Fed easing cycle. We do not think this Banxico announcement necessitates a forecast change, and the peso will comfortably outperform its steep forward curve.          Non-resident holdings of Mexican government securities  
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A Week of Central Bank Meetings and Currency Moves: FX Daily Insights

ING Economics ING Economics 18.09.2023 09:33
FX Daily: Up and down - a big week for policy rates and currencies There are a plethora of central bank policy rate meetings this week across the developed and emerging market economies. Rates could be raised as much as 500bp in Turkey, cut 50bp in Brazil, raised 25bp in four G10 economies, and left unchanged in the US. Our baseline assumes that the dollar holds onto its strength through the week.   USD: Dollar looks likely to hold gains It is a big week for policy rate meetings, with six of the G10 central banks in action. Setting the tone for global markets will be Wednesday's FOMC meeting. Here, our team sees a resolutely hawkish Federal Reserve, where despite unchanged rates the Fed, through its statement and dot plots, will hold out the possibility of one further hike to the 5.50-5.75% range later this year.  Even though we should see 25bp rate hikes across four European central banks through the week - see below - we doubt the dollar has to lose much ground - if any. The prospect of a prolonged period of unchanged rates is depressing US interest rates and cross-market volatility and leaving carry trade strategies very much en vogue. This - plus Brent trading close to $95/bbl - is keeping the likes of USD/JPY bid and few expect any substantial move in Bank of Japan policy this Friday. If there is to be a further move from Japan - it will likely come in late October when new economic forecasts are released. It is also a big week for policy rate meetings in emerging markets. In EMEA, the highlight will be whether the Central Bank of Turkey delivers another large hike on Thursday (+500bp expected) in a continuing return to policy orthodoxy, while Brazil should cut rates another 50bp in line with recent guidance. Given the strong interest in the carry trade this year, both the Turkish lira and Brazilian real could stay supported despite these diverging rate stories.  Elsewhere, Asia sees several rate meetings this week, but change is expected in neither China's Loan Prime Rates nor policy rates elsewhere in the region. DXY remains relatively strong and there does not seem a case for a decisive turn lower this week - unless we are all surprised by the Fed. There is a strong band of resistance in the 105.40/80 area, which may well cap this week. But equally, DXY should continue to find decent demand below 105.00. 
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FX Markets React to Rising US Rates: Implications and Outlook

ING Economics ING Economics 25.09.2023 11:07
FX Daily: Re-pricing for a world of higher US rates FX markets are settling down after a big week of central bank policy announcements. Perhaps the biggest story is that the world's 10-year benchmark borrowing rate is pressing at 4.50% – seemingly on the view that a new neutral rate for Fed Funds may be 4%, not 2.5%. Expect the dollar to hold gains as Europe braces for another soft run of PMI data.   USD: 4.50% on the US 10-year yield could pressure risk assets US interest rates continue to grind higher. Overnight, the US 10-year Treasury yield has edged up to 4.50% – the highest since 2007. Driving the move continues to be a re-assessment of the Fed's higher-for-longer policy. Looking out along the USD OIS curve, investors struggle to see short-term US rates (one month OIS) below the 4.00% area over the next 15 years. Our rates strategy team argues that it is fair to see a modest positively sloping yield curve over that period and the 10-year priced 50bp above this 4% low point. This grind higher in US yields – marking higher risk-free rates – creates headwinds for risk assets such as equities, credit and emerging markets. Indeed, even the AI-powered S&P 500 is having a bad month, though it is still up 12.8% year-to-date. This equity correction is supportive news for the dollar, where any move to cash will mostly end up in the liquid dollar that pays 5.30% overnight rates. For today, another bleak run of PMIs in Europe may well keep European currencies soft and the dollar bid. The US data calendar today sees the flash PMIs for September, where the composite PMI remains just above 50. This data has not been market-moving recently. More important was yesterday's release of the lowest weekly jobless claims since January which suggested there are very few signs of a robust US labour market turning.  Expect DXY to remain bid and there is a scenario where the dollar stays strong into mid-October, when large US corporates based in California need to pay their taxes.

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