Emerging Markets: What Has Changed

• The Brazilian central bank raised rates by 50 bps to 10.50%, but the addition of the qualifier “at this moment” likely signals a change of pace at the next meeting
• Anti-government protests are blockading roads in Bangkok and have rejected a government offer to postpone the planned February 2 elections; we would fade the recent rally in Thai assets
• Moscow’s lending spree continues as Russia tries to widen its sphere of influence



The Central Bank of Russia cut its "targeted" FX interventions from $60 mln/day to $0/day

Over the last week, Poland (+3.5%), Thailand (+3.5%), and Indonesia (+5%) have outperformed in the EM equity space in local currency terms, while China (-0.5%), Colombia (-1%), and Malaysia (-1%) have underperformed.

In the EM local currency bond space, Turkey (10-year yield up 19 bp), Peru (up 9 bp), and South Africa (up 7 bp) have underperformed over the last week, while Indonesia (10-year yield down 47 bp), Brazil (down 21 bp), and India (down 17 bp) have outperformed. In the EM FX space, BRL (+1% vs. USD), INR (+1%) and THB (+0.7%) have outperformed over the last week, while MXN (-1.1%), TRY (-1%), and PHP (-1%) have underperformed vs. USD.


1. The Brazilian central bank raised rates by 50 bps to 10.50%, as we expected. However, the addition of the qualifier “at this moment” likely signals a change of pace at the next meeting. As such, another 25 bp hike on February 26 seems likely, which will probably mark the end of the tightening cycle. This reinforces our view that the 2.40 top for USD/BRL should hold, but it also suggests the possibility of a flattening trend for the local swaps curve.
2. Anti-government protests are blockading roads in Bangkok and have rejected a government offer to postpone the planned February 2 elections. The opposition remains confrontational and is showing no signs of backing down. Still, the protests have been surprisingly peaceful so far. The 2010 protests saw violent clashes that led to 90 deaths, so the current situation is still relatively positive (emphasis on relatively). And the fact that the military has not yet gotten involved is a positive sign. In any case, we believe the recent rally in Thai assets is unsustainable, and we look for an opportunity to fade it in the coming days. The economic outlook, already weakening before the protests, has only gotten worse.
3. Moscow’s lending spree continues. This time, Hungary received a $14 bln package to finance two Russian-built nuclear reactors. The agreement follows a $15 bln loan to Ukraine and a $2 bln one to Belarus. Obviously, no deal from Moscow comes at a cheap price. Just as Ukraine took a step back from the EU to secure its loans, Hungary is now one notch more interwoven with Moscow for its energy needs.
4. The Central Bank of Russia cut its "targeted" FX interventions from $60 mln/day to $0/day. It will still do other FX intervention operations totalling up to $200 mln/day, but basically, the move means less official action to influence the exchange rate. From the central bank's website: "This adjustment was made to ensure further increase of the rouble exchange rate flexibility in the context of the ongoing transition to the floating exchange rate by 2015." Lower oil prices have also been weighing on the ruble recently. Foreign reserves fell below $500 bln this week for the first time since January 2012.

(From my coleagues Dr. Win Thin and Ilan Solot)

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Written By: Marc Chandler