Any hopes of policy support for the rand from the South African Reserve Bank (SARB) have vanished. The currency fell 1 percent after yesterday’s SARB meeting where Governor Gill Marcus made it clear she would not be standing in the way of the rand’s move south. It is now trading at 9.32 per dollar.
More losses look likely, especially if foreign bond investors throw in the towel, a move which analysts at Societe Generale liken to “the market equivalent of a volcanic eruption”. Foreigners, after all, own more than 36 percent of the 1 trillion-rand market in local currency sovereign bonds.
Victims of the dollar’s strength are piling up.
Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds’ problems are down to how EM currencies are performing against the dollar.
JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late (it’s up almost 4 percent in 2013 against a grouping of major world currencies) that’s unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets — South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.
LONDON (Reuters) – South Africa faces the risk of a huge exodus of foreign investors who are seeing the plunge in the rand’s value rapidly erode their stock and bond returns.
Africa’s largest economy has sucked in huge investments in the past two decades, but also has one of the world’s biggest balance of payments deficits – over 6 percent of its economy – and depends almost fully on portfolio capital to plug the gap.
Sterling looks likely to be one of this year’s big G10 currency casualties (the other being yen). Having lost 7 percent against the dollar and 5.5 percent to the euro so far this year on fear of a British triple-dip recession, sterling probably has further to fall. (see here for my colleague Anirban Nag’s take on sterling’s outlook).
Many see an opportunity here — as a convenient funding currency to invest in emerging markets. A funding currency requires low interest rates that can bankroll purchases of higher-yielding assets including stocks, other currencies, bonds and commodities. Sterling ticks those boxes. A funding currency must also not be subject to any appreciation risk for the duration of the trade. And here too, sterling appears to win, as the Bank of England’s remit widens to give it more leeway on monetary easing.
LONDON, March 20 (Reuters) – South Africa faces the risk of
a huge exodus of foreign investors who are seeing the plunge in
the rand’s value rapidly erode their stock and bond returns.
Africa’s largest economy has sucked in huge investments in
the past two decades, but also has one of the world’s biggest
balance of payments deficits – over 6 percent of its economy -
and depends almost fully on portfolio capital to plug the gap.
March 13 (Reuters) – India’s stubbornly high inflation must
come down to a 4 to 6 percent range, the country’s central bank
chief said on Wednesday, noting full implementation of this
year’s budget will have a “softening impact” on price growth.
“The Reserve Bank has to ensure that inflation is brought
down to the threshold level and is maintained there,” Duvvuri
Subbarao, the Governor of the Reserve Bank of India (RBI)told
students in London.
LONDON, March 12 (Reuters) – Sovereign wealth funds (SWFs)
are set to see their assets grow to $5.6 trillion by the end of
2013, a study found, a sum more than double British GDP and
underscoring their status as the world’s wealthiest investors.
SWFs, state-owned vehicles such as the Qatar Investment
Authority which manage windfall revenues for future generations,
have become key global market players after the financial
crisis, spending an estimated $90 billion buying up stakes in
Western banks including Barclays Plc for instance.
Inflation is finally biting Brazilian policymakers. The real strengthened around 1.5 percent last week without triggering the usual shrill outcries from government ministers. Nor did the central bank intervene in the currency market even though the real is the best performing emerging currency this year. The bank in fact shifted towards a more hawkish policy stance during its March meeting, a move that seems to have had the blessing of the government.
Friday’s data showed the benchmark consumer price index, IPCA, up 0.6 percent for a year-on-year inflation rate of 6.31 percent. President Dilma Rousseff, who faces elections next year, took to the airwaves soon after to reassure voters about her commitment to taming inflation, announcing a series of tax cuts. That effectively is a signal that there is now no political constraint on raising interest rates. According to the political risk consultancy, Eurasia:
An action-packed week for emerging monetary policy.
First we had Poland stunning markets with a half-point rate cut when only 25 bps was priced. Governor Marek Belka said the double-cut marked a “full stop” after several cuts. Then came Brazil which kept rates on hold at 7.25 but turned hawkish after spending over 18 months in dovish mode. (Rates stayed on hold in Indonesia and Malaysia).
In Brazil, it was high time. Inflation and inflation expectations have been rising for a while, the yield curve has been steepening and anxiety has grown, not only about the central bank”s commitment to controlling inflation but also about its independence. Whether the central bank will actually start a hiking cycle anytime soon is another matter. Barclays reckon it will, predicting three consecutive 50 bps rate hikes starting from April. But analysts at Societe Generale are among those who are betting on flat rates for now. They point out that since the meeting, the Brazilian yield curve has moved to its flattest in a year and the 2017 inflation breakevens (the difference between the yields on fixed-rate and inflation-linked bonds of similar maturity) have fallen more than 50bps:
LONDON (Reuters) – Record high stocks? Currency surges? In the United States maybe, but across emerging markets, slowing economies and collapsing exports are hammering company profits far harder than in the seemingly hobbled West.
While world stocks have risen more than 5 percent already this year, led by Wall Street’s surge to record highs, bourses from China to Brazil are flat to negative in dollar terms, unnerving those who fear a third year of stop-start performance.