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28 Dec 2015
Winners and losers amongst FX space in 2016 – SocGen
FXStreet (Delhi) – Research Team at Societe Genrale, suggests that the dollar is expected to remain on an upward trajectory in 2016 but the gains against EM currencies will be modest (3.3%) compared to that experienced in 2014 and 2015 (13%).
Key Quotes
“High yielders with current account deficits such as the BRL, IDR, TRY, and ZAR will remain at the mercy of poor risk appetite and weak capital inflow dynamics.”
“The RMB is expected to embark on a path of gradual and controlled depreciation that will drag down the entire regional currency complex, but more so those with high export exposure and similar trade structures (KRW and TWD). The MXN and CLP will show modest losses by comparison as Banixo embarks on an aggressive campaign to raise interest rates by 200bp and BCCh hikes by 75bp in the first half of the year.”
“It is not all doom and gloom. The RUB is expected to do well next year as domestic factors coupled with modestly higher oil prices will prove beneficial. The PLN, HUF, CZK, and RON are expected to outperform the EUR on the back of prominent ECB QE spill-over effects given the closer financial ties to the euro area, robust domestically-generated growth dynamics, and suppressed inflation.”
“Regionally, Asian currencies will underperform as the weight of China’s growth slowdown and currency depreciation has a disproportionate impact. Mitigating more significant weakness is the interventionist tendencies of central banks backed by their huge stockpile of FX reserves and favourable external positions. The next worst-performing region is expected to be LATAM, followed by the EMEA dollar bloc.”
“In contrast, the CEE countries will move in the opposite direction against the EUR. Real GDP performance (in excess of 3% yoy, on aggregate), natural support from strong basic balances and absorption of EU inflows remain antithetical to recurrent bouts of scrutiny on the more vulnerable high yielders in the region. The gradual recovery across Europe and limited direct exposure to China should shelter regional export dynamics, although a gradual pick-up in import demand may act as an offsetting factor for net exports in 2016. FX valuations will continue to mirror the benefits of the commodity super-cycle, with spot levels still lagging the past year’s improvements in terms-of-trade.”
“On a carry-adjusted basis there is significantly more differentiation across countries and a more neutral assessment of EM currency performance. The majority of EM currencies that are expected to underperform the forwards are low yielders in Asia. Our top pick for a second straight year on a carry-adjusted basis within Asia is the INR. As a group, LATAM is expected to outperform the forwards with Brazil leading the way. The RUB will post the best carry-adjusted performance followed by the PLN. Regionally, the EMEA dollar bloc will perform the best, followed by the EMEA EUR bloc.”
Key Quotes
“High yielders with current account deficits such as the BRL, IDR, TRY, and ZAR will remain at the mercy of poor risk appetite and weak capital inflow dynamics.”
“The RMB is expected to embark on a path of gradual and controlled depreciation that will drag down the entire regional currency complex, but more so those with high export exposure and similar trade structures (KRW and TWD). The MXN and CLP will show modest losses by comparison as Banixo embarks on an aggressive campaign to raise interest rates by 200bp and BCCh hikes by 75bp in the first half of the year.”
“It is not all doom and gloom. The RUB is expected to do well next year as domestic factors coupled with modestly higher oil prices will prove beneficial. The PLN, HUF, CZK, and RON are expected to outperform the EUR on the back of prominent ECB QE spill-over effects given the closer financial ties to the euro area, robust domestically-generated growth dynamics, and suppressed inflation.”
“Regionally, Asian currencies will underperform as the weight of China’s growth slowdown and currency depreciation has a disproportionate impact. Mitigating more significant weakness is the interventionist tendencies of central banks backed by their huge stockpile of FX reserves and favourable external positions. The next worst-performing region is expected to be LATAM, followed by the EMEA dollar bloc.”
“In contrast, the CEE countries will move in the opposite direction against the EUR. Real GDP performance (in excess of 3% yoy, on aggregate), natural support from strong basic balances and absorption of EU inflows remain antithetical to recurrent bouts of scrutiny on the more vulnerable high yielders in the region. The gradual recovery across Europe and limited direct exposure to China should shelter regional export dynamics, although a gradual pick-up in import demand may act as an offsetting factor for net exports in 2016. FX valuations will continue to mirror the benefits of the commodity super-cycle, with spot levels still lagging the past year’s improvements in terms-of-trade.”
“On a carry-adjusted basis there is significantly more differentiation across countries and a more neutral assessment of EM currency performance. The majority of EM currencies that are expected to underperform the forwards are low yielders in Asia. Our top pick for a second straight year on a carry-adjusted basis within Asia is the INR. As a group, LATAM is expected to outperform the forwards with Brazil leading the way. The RUB will post the best carry-adjusted performance followed by the PLN. Regionally, the EMEA dollar bloc will perform the best, followed by the EMEA EUR bloc.”