EM currencies sank amid surge in uncertainty
The emerging market complex has been caught in cross fire since yesterday after Donald Trump said Canada and Mexico would be excluded from the tariffs, provided that the three countries succeed in reaching a new NAFTA agreement, while other countries will still be subject to it. Therefore, it maintains the pressure on other commodity exporting countries, which casts a shadow on their growth outlook. Secondly, the continuous increase in US Treasury rates is adding pressure on higher-yielding currencies as it reduces the return of carry trades. As example, the 2-year interest rate differential between the US and Brazil currently stands at around 6%, compared to more than 16% in September 2015. The tightening that is underway in the US could only reduce the attractiveness of those currencies.
Yesterday, the Brazilian real fell 1% as USD/BRL rose to 3.2433, the Chilean pesos was off 0.43% with USD/CLP rising to 602.69. bThis morning, the South African rand fell 0.25% as USD/ZAR climbed to 11.8651. Given the rising uncertainty stemming from Trump trade war, we think that investors would cherry pick their EM investments and stick to currencies would be the least impacted by the new US tariffs, meaning countries that are doing the least business with the US. Indeed, what guarantee that President Trump will not use the same trick to target specific trade partners with which the US has a trade deficit?
DAX up 1.09% before today’s ECB monetary policy meeting
European stocks closed higher yesterday, as political tensions start rising in the US, now that Trump’s economic adviser Gary Cohn publicly confirmed his resignation with immediate effect, an event that does not augur well for US – EU trade agreements. Inflation in the EU remains sluggish (February Eurostat flash CPI Y/Y given at 1.20%) while the EUR starts strengthening against major currencies. EUR/USD and GBP/EUR are valued at 1.24 and 0.89 (YTD: +3.31% and +0.47%). Adding up all these factors with further political risks with regard to uncertainty as to the future coalition between Italian parties (out of which unconventional parties will have a decent legislative power), we see no reasons for the ECB to have a hawkish stance for now. Euro Zone benchmark interest rate is at -0.40% and is expected to remain so for the whole year while ECB’s asset purchasing program of EUR 30 billion is not expected to change for now.
German DAX was leading the way on European side, closing at 12’245 (+1.09%), supported by Real Estate (+2.79%), IT (2.21%), Health Care (+1.77%), Materials (+1.32%) and Financials (+1.14%). It seems that nothing stops German economy to expand since the maintenance of current political coalition with Merkel confirmed on Monday. The Euro Zone was heading in the same direction, as investors confidence remains (Euro Stoxx 50 +0.58%), though tariff war escalation with the US is taking larger proportions.
