Currency Fighters’ Battle Fatigue Fits
Major emerging market currencies ended Q1 mixed despite the bond flow redirection into local markets, with strength mostly against the euro and yen but leaders up just 5 percent against the dollar. The Thai baht topped the roster as the number two Asian equity performer as well, on the heels of a third ratings agency upgrade to BBB+ as Fitch reversed a previous demotion in the wake of political bloodshed. A $2 billion construction firm ipo captured enthusiasm about post-flood recovery, party reconciliation as the prime minister slowed moves to grant her exiled brother and predecessor judicial amnesty, and a wave of infrastructure “mega-projects” alongside other fiscal stimulus including car sales incentives and minimum wage hikes. Core inflation is below 1 percent and the central bank has been on hold as the current account balance swings between monthly deficit and surplus. With the auto push Japanese manufacturers are looking to rebuild their presence with the timetable accelerated by the weakening yen under the unprecedented monetary easing there. The Mexican peso has been the other outstanding gainer with a surge to 12 to the greenback despite an unexpected 50 basis point benchmark rate cut. Bullish futures bets were up 50 percent in March on the Chicago Mercantile Exchange as President Pena Nieto visited the White House and unveiled anti-monopoly media and telecoms industry steps. A Pemex reform proposal could follow by the end of the current congressional session to sustain early tenure confidence as export and factory indicators continue to decline. After a prolonged period criticizing neighbors’ currency intervention stance, the authorities may be considering daily fluctuation limits, and with the stock market again in the positive column a capital gains tax is on the table as a way to boost short-term collection. S&P raised the sovereign outlook to positive but stipulated the need to far-reaching fiscal overhaul and anti-drug security improvement.
Elsewhere in Latin America, Brazil remained a favorite despite well-established capital inflow taxes and central bank real meddling to keep the rate around 1.9. With above-target 6 percent inflation the benchmark Selic is due to be raised in a rare regional and global tightening which could further stifle flat GDP growth. The primary budget surplus may fall to half the 3 percent of GDP norm with consumer tax exemptions as the current account gap continues to worsen with Chinese cancellation of a major soybean shipment. Agricultural commodity prices are down and iron ore giant Vale faces back tax claims from multinational subsidiaries. State-owned Bank of Brazil will float its insurance unit in an attempt to revive the flailing stock exchange and also boost its US-listed ADRs. Japanese institutional and retail money meanwhile is expected to resume record allocation with Governor Kuroda’s historic quantitative expansion at home dragging the yen to 100 to the dollar. In Asia in turn another decent spike has come from Malaysia’s ringgit just prior to May elections where the opposition is in formidable combat position.
