Quarterly Currency Outlook - Emerging Markets MarketQuants Research Quarterly - 2019 Q1 - tac economics
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Emerging Markets Quarterly Currency Outlook MarketQuants Research Quarterly - 2019 Q1
Completed on January 14, 2019 TAC ECONOMICS www.taceconomics.com
Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1 Content 1. Key background elements for EM currencies .............................................................................................. 4 2. Detailed Currency Outlook ............................................................................................................................. 5 Summary tables ..........................................................................................................5 Brazilian Real - BRL ......................................................................................................6 Chinese Yuan - CNY ......................................................................................................7 Indian Rupee - INR .......................................................................................................8 Indonesian Rupiah - IDR ................................................................................................9 Korean Won - KRW ..................................................................................................... 10 Mexican Peso - MXN ................................................................................................... 11 Polish Zloty - PLN....................................................................................................... 12 Russian Ruble - RUB ................................................................................................... 13 South African Rand - ZAR ............................................................................................. 14 Turkish Lira - TRY ....................................................................................................... 15 3. Methodology .................................................................................................................................................. 16 TAC ECONOMICS www.taceconomics.com 3
Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
1. Key background elements for EM currencies
Our Quarterly Currency Outlook is driven by the well as to the corporate sector. In addition,
following global scenario on Emerging Markets and present pick up in global strategic tensions (trade
Developing Economies: protectionism, Brexit, elections) could lead to
- Economic deceleration is materializing for EM significant economic depression in EM.
with headwinds from external factors (tightening
in global USD liquidity, USD appreciation, trade
tensions) and declining support from domestic EUR/USD Markov Switching model
Exhibit 1 - EUR/USD projections Exhibit 2 - EUR/USD Markov Switching model
factors (monetary
Expected tightening,
large oscillations, cyclical
towards 1.15 downturn
in 2020H1
Financial logic (bond yield differential) likely to prevail
Financial logic (bond yield differential) likely to prevail
in investment and confidence, policy
uncertainties).
- The broad cyclical downturn is expected to get
worse post mid-2019 when the simultaneous
slowdown in China and reversal in the US
dampen world economic and financial dynamics.
- However, exchange rate and policy adjustments
initiated in 2018 in many among the large EM
have created both resilience capabilities and
policy space. Our quantitative tools also support
the view that the 10 Key EM 1 would be able to
better weather the cyclical storm, with more
resilient currencies and the ability to stimulate
Source: TAC ECONOMICS
domestic demand as a reaction to external
headwinds. In these large EM however,
vulnerabilities remain high for corporate and EUR/USD Projections
bank borrowers.
- Mid-size countries and those substantially
exposed to commodity prices would concentrate
most of the larger risks, including pressures on
currency rates, fiscal difficulties and down-
pressures on activity.
- The major risks to our central scenario are
related to political and economic policies
potentially detrimental to businesses and
households’ confidence and investments. In
particular, increasing difficulties for Chinese
authorities to manage further the cyclical
Source: TAC ECONOMICS
slowdown could rapidly trigger “disorderly”
adjustments to banks and financial markets, as
1
China, India, Indonesia, South Korea, Brazil, Mexico,
Turkey, Russia, Poland, South Africa
TAC ECONOMICS
www.taceconomics.com 4Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
2. Detailed Currency Outlook
Summary tables
Exchange Rate Forecasts for June 2020
(month average against Euro)
Spot rate Mixture model
Jan. 8, 2018 mode 75% confidence interval
Brazilian Real (BRL) 4.26 4.73 3.9 – 5.8
Chinese Yuan (CNY) 7.84 8.36 7.8 – 9.0
Indian Rupee (INR) 80.2 80.6 76.7 – 84.2
Indonesian Rupiah (IDR) 16,182 17,557 14,853 – 20,424
Korean Won (KRW) 1,289 1,296 1,070 – 1,539
Mexican Peso (MXN) 22.2 25.5 24.0 - 26.9
Polish Zloty (PLN) 4.31 4.37 4.2 - 4.6
Russian Ruble (RUB) 76.7 94.0 80.5 – 108.4
South African Rand (ZAR) 16.0 17.7 16.4 – 19.0
Turkish Lira (TRY) 6.29 6.02 5.6 – 6.4
Cross-Rates Forecasts for June 2020
(month average)
BRL CNY INR IDR KRW MXN PLN RUB ZAR TRY
USD 4.06 7.19 69.3 15,110 1,116 21.9 3.75 80.9 15.2 5.18
EUR 4.73 8.36 80.6 17,557 1,296 25.5 4.37 94.0 17.7 6.02
BRL 1.77 17.0 3,710 273.9 5.39 0.92 19.9 3.74 1.27
CNY 0.57 9.6 2,101 155.1 3.05 0.52 11.24 2.12 0.72
INR 0.06 0.10 217.9 16.1 0.32 0.05 1.17 0.22 0.07
IDR 0.00 0.00 0.00 0.07 0.00 0.00 0.01 0.00 0.00
KRW 0.00 0.01 0.06 13.5 0.02 0.00 0.07 0.01 0.00
MXN 0.19 0.33 3.16 688.3 50.8 0.17 3.68 0.69 0.24
PLN 1.08 1.91 18.4 4,014 296.4 5.83 21.5 4.04 1.38
RUB 0.05 0.09 0.86 186.9 13.8 0.27 0.05 0.19 0.06
ZAR 0.27 0.47 4.56 993.2 73.3 1.44 0.25 5.32 0.34
TRY 0.79 1.39 13.4 2,916 215.3 4.24 0.73 15.6 2.94
TAC ECONOMICS
www.taceconomics.com 5Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Brazilian Real - BRL
The combination of (1) persistence of a WatchList TAC ECONOMICS Projections
Indication pointing to prolonged high vulnerability (Mixed econometric and RiskMonitor approach)
for the exchange rate up to 2021Q2, (2) potential
Spot June Dec. June
international financial turbulences and (3)
Jan. 8 2019 2019 2020
expected upward pressures on prices in the near-
term suggest that volatility will remain high during EUR/BRL 4.26 4.58 5.05 4.73
2019 and a further depreciation up to USD/BRL 4.0-
4.2 is likely starting from 2019H2.
Econometric Projections
Brazilian capital markets were under heavy political
influence over the past months, with substantial capital
inflows before President J. Bolsonaro’s election. With
stable domestic interest rates and increasing global risk
aversion, the USD/BRL depreciated again to 3.91 in mid-
Dec. 2018. Since Bolsonaro has taken offices on Jan. 1,
2019, the Brazilian Real has resumed its reappreciation
to USD/BRL 3.71 on Jan. 8, 2019.
Selic rate has remained stable so far but our policy
reaction function and the likely increase in inflation
during 2019 suggest a tightening process around mid-
2019, with a magnitude directly related to the potential
international financial turbulences.
RiskMonitor Analysis
Brazil’s average Economic & Financial Risk rating has
registered a visible improvement in 2018Q3, to 48.3
from 49.8 in Q2 and continuing a movement initiated in
2016. This decline in Risk rating mostly reflects a large
improvement in the Growth Balance (positive reversal
of the current account for two years).
A detailed examination of our range of risk metrics
supports a much more cautious view for later horizons.
Indeed, the recent reduction in short-term horizon’s
Risk rating (46.1 for the less than 1-year horizon) has
expanded the gap with longer-term Risk rating, which
stays at an elevated level (52.5 for 3 to 5 years).
Uncertainties are reinforced by the persistence of a
WatchList Indication pointing to prolonged high
vulnerability for the exchange rate up to 2021Q2.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 4.29 6% 4.4 4.1
Mar. 2019 4.28 11% 4.5 4.1
Dec. 2019 4.46 16% 4.9 4.2
June 2020 4.55
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 6Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Chinese Yuan - CNY
The country remains affected by a WatchList TAC ECONOMICS Projections
Indication suggesting a high vulnerability to sudden (Mixed econometric and RiskMonitor approach)
shocks on the currency. Our central scenario is a
Spot June Dec. June
significant but controlled economic slowdown and
Jan. 8 2019 2019 2020
a further 5%-10% depreciation of the CNY against
the USD. EUR/CNY 7.84 7.82 8.86 8.36
Econometric Projections
GDP growth has slowed in 2018Q3 (+6.5% y/y), with
lower growth for investment spending and moderating
consumer spending. In 2018Q4, retail-sale dynamics
have been negatively affected by the decline in car
sales, amplified by the end of fiscal subsidies. Monetary
policy transmission is constrained by declining
confidence and expectations, and persistent liquidity
injections have not prevented a modest pick-up in
interbank rates. This in turn has supported the CNY
exchange rate, in parallel with markets’ over-reactions
to US-China dialogue.
Our central scenario for China outlook is one of
significant but controlled economic slowdown and a
further 5%-10% depreciation of the CNY against the
USD, but a vicious circle of more rapid economic
deceleration despite supportive policies and increasing
worries on the financial sector could create conditions
for a more disorderly process.
RiskMonitor Analysis
The average Economic & Financial Risk Rating of China
remained stable at an “intermediate” level around 43-C.
The overall stabilization is associated with higher risks
on activity, then exchange rate and a much lower
reading for payment. The metrics support a scenario of
an increase in risk materialization during 2019. This is
consistent with our expectations of simultaneous
deterioration in our Fundamental Balances for Growth
(rapidly declining current account surplus, slowing GDP
growth) and Liquidity (declining Fx reserves). The
country remains affected by a Watch List Indication
suggesting a high vulnerability to sudden shocks, on the
currency but also indirectly on economic activity.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 7.9 3% 8.0 7.8
Mar. 2019 8.0 5% 8.2 7.8
Dec. 2019 8.3 11% 8.8 7.8
June 2020 8.4
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 7Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Indian Rupee - INR
Despite the currency overvaluation, low inflation TAC ECONOMICS Projections
and good economic performance should support (Mixed econometric and RiskMonitor approach)
the Rupee in the medium-term.
Spot June Dec. June
Models suggest the Indian Rupee to stabilize just Jan. 8 2019 2019 2020
above USD/INR 70.0 (EUR/INR 80 in 2020Q2).
EUR/INR 80.2 75.7 82.4 80.6
Econometric Projections
The Indian Rupee has been highly volatile since its
historical low (74.4 against USD on Oct. 9),
reappreciating by +6.5% in Oct.-Nov. thanks to
contraction in oil prices, then depreciating (-3% to
USD/INR 72 on Dec. 18) due to renewed global and
domestic policies uncertainties.
Inflation has corrected sharply in the last few months
(+2.3% y/y in Nov.); indeed, food prices are receding on
the back of improving physical and digital agricultural
markets infrastructures. After hiking twice its key policy
rate (+25bp each in June and Aug. 2018 to 6.50%), the
RBI has paused its monetary tightening thanks to
reduced inflationary pressures. Yet, in spite of potential
bouts of currency depreciation and rapid pass-through
on domestic prices (mostly fuel), S. Das, the new RBI
Governor, could initiate a more accommodative stance
in the coming quarters.
RiskMonitor Analysis
The Economic & Financial Risk rating has stabilized at a
favorable level (37.3-B in 2018Q3) owing to very low
level of risk on structural (Growth and Debt) and
Liquidity Balances. Overall, risks are concentrated on
the short-term horizon with potential bouts of steep
currency volatility and ongoing slowdown in the
momentum of domestic demand.
On the Foreign Exchange Balance, the plunge in forex
reserves quality after 2018Q1 indicates that the
reversal in forex reserves comes from substantial cross-
border capital flows. The Indian Rupee is modestly
overvalued despite the large currency depreciation in
2018 (-16% against USD between Jan. and Oct.). With
the recent re-appreciation, potential currency
adjustment is increasingly likely in the short-term.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 82.1 10% 87.0 78.9
Mar. 2019 83.3 12% 88.1 78.4
Dec. 2019 86.2 17% 94.0 79.5
June 2020 86.4
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 8Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Indonesian Rupiah - IDR
The Indonesian economy is currently well oriented TAC ECONOMICS Projections
with strong domestic demand and low inflationary (Mixed econometric and RiskMonitor approach)
pressure. However, after a relative stable period in
Spot June Dec. June
2019H1, the Indonesian Rupiah could start
Jan. 8 2019 2019 2020
depreciating due to lower oil price.
EUR/IDR 16,182 15,962 18,485 17,557
Our models suggest the USD/IDR close to 15,100 in
2020H1 (EUR/IDR 17,500).
Econometric Projections
The depreciating trend of the Rupiah has ceased until
Oct. 2018 (up to USD/IDR 15,290); then policy efforts by
the Central Bank BI (adequate liquidity, tightening
stance) have led to a rapid reappreciation in November
(-6.6% to about USD/IDR 14,500 in mid-Dec.). Further
currency volatility is very likely because of ongoing
global trade and financial tensions.
The BI has hiked its key policy rate (+25bp to 6.0%), third
consecutive hike, because of weakening currency and
deteriorating current account. The BI will continue to be
vigilant about forex stability, without necessarily
tightening further its monetary stance in the first
quarters of 2019.
However, our scenario for oil prices suggests Brent
prices hovering around 50$/bl at the end of 2019 and
early 2020. It should weigh on the Rupiah starting in the
second half of 2019.
RiskMonitor Analysis
The Economic & Financial Risk ratings has steadily
improved since 2017, reaching the low risk category
(39.7-B in 2018Q3) due to strong domestic demand with
managed inflationary pressures.
On the Foreign Exchange Balance, further move into
the unsustainable overvaluation quadrant is due to
significant outflows of volatile short-term capital, while
the gradual depreciation of the Indonesian Rupiah until
October 2018 has not been sufficient to reduce the mild
currency overvaluation, as competing currencies,
notably in Asia, have also weakened in parallel.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 16,652 9% 17,518 16,002
Mar. 2019 16,867 13% 17,981 15,801
Dec. 2019 17,509 16% 18,981 16,248
June 2020 17,529
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 9Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Korean Won - KRW
The dynamics of the CNY and expected slowdown in TAC ECONOMICS Projections
activity could weigh on the KRW in 2019H2. Overall, (Mixed econometric and RiskMonitor approach)
the models suggest an erratic path against the EUR
Spot June Dec. June
up to early 2020 to EUR/KRW 1,300 in 2020Q2.
Jan. 8 2019 2019 2020
Econometric Projections
EUR/KRW 1,289 1,191 1,372 1,296
The Korean Won has oscillated around USD/KRW 1125
due to ongoing trade tensions between China and US.
Short-term fluctuations are likely to persist, and a
weaker Won should strengthen the competitive
advantage of the already strong export sector. Bank of
Korea (BoK) has unexpectedly raised its policy rate on
Nov. 30, 2018 (+25bps to +1.75%) to curb escalating
domestic debt, especially in the housing market, and
adjust to the impact of monetary policy normalization
in advanced economies.
GDP growth has reduced in 2018Q3 (+2.0% y/y from
+2.8% in Q2) to its lowest level in the past nine years.
Going forward, increase in minimum wages (+16% in
2018 and +11% in 2019) and in government spending
should support domestic demand.
RiskMonitor Analysis
The Economic & Financial Risk rating has suddenly
spiked in 2018Q3 (to 41.9-C), this degradation is
corroborated by a new Watch List Indication on
Economic Activity, which highlights a vulnerability to a
significant shock on the business cycle for the period
2018Q3-2020Q2. Indeed, downturn in our leading
indicator of economic activity, coupled with trade
tensions between China-U.S. and expected recession in
Japan (end-2019), portends a risk of sharp reduction in
economic growth (from mid-2019) which would
translate into strong pressures on the Korean Won and
on the banking sector (because of high domestic debt).
On the Foreign Exchange Balance, while the Korean
Won continues to be neutrally valued, the forex
reserves quality remains insufficient due to sizeable
short-term speculative and banking flows, this
combination entails substantial currency volatility, as
registered since July 2018.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 1,289 4% 1,311 1,257
Mar. 2019 1,298 8% 1,351 1,248
Dec. 2019 1,352 17% 1,494 1,265
June 2020 1,364
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 10Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Mexican Peso - MXN
Mexican Peso enjoys a very favorable exchange rate TAC ECONOMICS Projections
competitiveness. However poor foreign exchange (Mixed econometric and RiskMonitor approach)
reserves portend currency volatility and the cyclical
Spot June Dec. June
reversal in the US suggest further depreciation to
Jan. 8 2019 2019 2020
USD/MXN 22.0 in 2020.
EUR/MXN 22.2 23.4 26.8 25.5
Econometric Projections
Following a modest appreciation of the Mexican Peso in
Sept. 2018, the currency has depreciated (+7.0% against
USD to around USD/MXN 20-20.5) given the
uncertainties in domestic economic reforms, rapid
fluctuations in oil prices and tensions on financial
markets. Inflationary pressures have mildly decelerated
(+4.7% y/y in Nov. 2018) due to decrease in energy, food
and beverage prices. However, inflation is expected to
remain above the official target (+3.0%) given the pass-
through effects of weak exchange rate. After pausing its
tightening cycle since July 2018, the Central Bank has
hiked its overnight interbank rate again (+25bp to +8.0%
in Nov. 2018), given the consolidation in inflationary
pressures (especially persistently strong core inflation).
The revision of projections compare to the latest
publication in Oct. 2018 is very limited. The Mexican
Peso should progressively depreciate to USD/MXN 22.0
in early-2020, i.e. above EUR/MXN 25.0.
RiskMonitor Analysis
The Economic & Financial Risk rating has continued to
edge upwards in 2018Q3 (to 34.9-B), predominantly
due to the ongoing degradation in the Foreign
Exchange Balance. In addition, Mexico continues to face
uncertainties on USMCA ratification (ex-NAFTA),
domestic policy stance of the new government along
with volatility in global oil prices, all likely to keep risks
at its current level if not higher. On the Foreign
Exchange Balance, although the weak Mexican Peso
enjoys a very favorable exchange rate competitiveness;
the forex reserves quality is poor given the sizeable
short-term capital (in & out) flows, hence portending
further currency volatility as already evidenced in 2018.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 23.2 7% 24.1 22.4
Mar. 2019 23.0 10% 24.3 22.0
Dec. 2019 24.1 14% 25.9 22.4
June 2020 24.4
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 11Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Polish Zloty - PLN
The PLN remains highly vulnerable to speculative TAC ECONOMICS Projections
capital flows as illustrated by the volatility in forex (Mixed econometric and RiskMonitor approach)
reserves accumulation in recent quarters.
Spot June Dec. June
Poland’s sensitivity to international financial Jan. 8 2019 2019 2020
turbulences should lead to bouts of volatility on the
EUR/PLN 4.31 4.40 4.33 4.37
currency, even though the PLN should remain in a
large range EUR/PLN 4.3-4.4 until mid-2020.
Econometric Projections
After registering an appreciating trend over 2017Q1-
2018Q1 (-6% against EUR), the Polish Zloty has
depreciated towards EUR/PLN 4.3 in 2018Q3.
Notwithstanding significant sensitivity to international
financial turbulences, leading to potential bouts of
volatility, the currency should remain in a large range
EUR/PLN 4.3-4.4 until the beginning of 2020. The
Central Bank (NBP) continues to keep its interest rate
unchanged (+1.5% since March 2015). The expected
temporary slowdown in economic growth and
manageable inflation with declining oil prices suggest
that the NBP should keep its interest rate unchanged
over the coming months.
RiskMonitor Analysis
The Economic & Financial Risk rating has declined in
2018Q3, at an average level (46.0-C), with most
Fundamental Balances at moderate risks level; thanks
to robust economic performances, Poland has
improved its position on the Growth, Cyclical and
Banking System Balances.
The trajectory of Poland has slightly deteriorated on
both Liquidity and Foreign Exchange Balances; the
small improvement in exchange rate competitiveness
(with the currency continuing depreciating against USD
close to 3.8 in Dec. 2018) but volatile forex reserves
accumulation in recent quarters (USD 108bn in 2018Q3,
covering 5 months of imports) is reflected through poor
forex reserves quality. Therefore, the currency remains
highly vulnerable to speculative capital flows.
Consensus Projections
end-of-period value against Euro
Mean Divergence Max Min
Jan. 2019 4.28 2.8% 4.32 4.20
Mar. 2019 4.28 3.5% 4.35 4.20
Dec. 2019 4.26 9.4% 4.50 4.10
June 2020 4.22
Source: Consensus Inc.
TAC ECONOMICS
www.taceconomics.com 12Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Russian Ruble - RUB
Despite a restored competitiveness of the currency TAC ECONOMICS Projections
after the 2018 adjustment (about -20% against (Mixed econometric and RiskMonitor approach)
USD), the sensitivity to oil prices with Brent moving
Spot June Dec. June
back to 50$/bl in 2019 will put unavoidable
Jan. 8 2019 2019 2020
downward pressure on the Ruble.
EUR/RUB 76.7 74.0 93.9 94.0
Econometric Projections
After the Russian Ruble’s steep fall (-21% against USD
between April and September 2018), the currency has
hovered around USD/RUB 66.0 until early 2019.
Central Bank of Russia has raised its key rate in Dec.
2018 (+25bps to 7.75%), a second increase this year,
given growing inflationary pressures, volatile external
conditions and planned VAT hike.
Our scenario for oil prices suggests Brent prices
hovering around 50$/bl at the end of 2019 and early
2020. It will weigh on the Ruble until 2020 in a context
of global financial tensions
RiskMonitor Analysis
After five quarters of rapid increase, the Economic &
Financial Risk rating has improved in 2018Q3 (42.5-C)
thanks to a more favorable exchange rate
competitiveness. Meanwhile persisting geopolitical
tensions (Ukraine-Russia crisis and international
financial sanctions) and pressures on global oil prices
are likely to maintain risk levels. Also, overall Risk
ratings has been mildly revised upward because of
higher principal repayments for 2017 (USD 100bn
against earlier figures of 69bn).
On the Foreign Exchange Balance, the Russian Ruble
has regained competitiveness in 2018Q3 (due to a +15%
depreciation against USD between Q1 and Q3) moving
further into a neutral valuation range. Yet, the currency
should continue to face further adjustment given the
geo-political tensions and ongoing US monetary
tightening.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 76.6 7% 80.4 75.0
Mar. 2019 76.4 18% 83.6 69.8
Dec. 2019 78.2 12% 83.0 73.5
June 2020 79.69
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 13Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
South African Rand - ZAR
The combination of limited economic growth, TAC ECONOMICS Projections
current account deficit, decline in foreign exchange (Mixed econometric and RiskMonitor approach)
reserves, decrease in commodity prices and
Spot June Dec. June
persistent sensitivity to international turbulences
Jan. 8 2019 2019 2020
points to the depreciation of the Rand towards
USD/ZAR 15.3 or EUR/ZAR 17.7 in 2020Q2. EUR/ZAR 16.0 15.5 18.4 17.7
Econometric Projections
After the past depreciation, the USDZAR oscillated
around 14.3 in 2018Q4. The Central Bank raised its
policy rate by +25bp to 6.75% in November. Further rate
hikes are likely in 2019 given the macro-prudential risks.
After two quarterly negative prints (“technical
recession”), the GDP growth expanded by +0.6% y/y in
2018Q3, supported by consumption and exports.
Inflation increased slightly to +5.2% in November 2018.
Combined with our adjusted Brent price projections,
inflation is unlikely to breach the official target range
(3%-6%).
The Rand is likely to remain volatile due to the
combination of limited economic growth, expanding
current account deficit, nascent decline in foreign
exchange reserves, probable decrease in commodity
prices and persistent sensitivity to global investor
sentiments towards emerging markets.
RiskMonitor Analysis
The Economic & Financial Risk rating has gradually
decline, to 45.4-C in 2018Q3, consistent with the past
rating trends, i.e. upward trend but short-term
adjustment. It reflects the slight improvement in the
short-term balances but still inherent structural
weaknesses that would take time to address (unlikely
before the May 2019 national elections).
The past South African Rand depreciation
(concentrated in 2018Q2) improved the exchange rate
competitiveness toward a slight undervaluation
indication. Therefore, the forex reserves quality has
remained insufficient owing to significant speculative
capital flows, which portends further currency volatility.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 16.1 12% 17.3 15.4
Mar. 2019 16.4 17% 17.7 14.9
Dec. 2019 16.6 32% 20.2 14.8
June 2020 16.8
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 14Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
Turkish Lira - TRY
Our Watch List Indication suggests an economic TAC ECONOMICS Projections
recession in 2019, therefore we maintain a (Mixed econometric and RiskMonitor approach)
substantial TRY risk premium.
Spot June Dec. June
However, reduced pressures on inflation and high Jan. 8 2019 2019 2020
interest rates should support the Turkish Lira close
EUR/TRY 6.29 5.67 6.62 6.02
to EUR/TRY 6.0 in 2019 and 2020H1.
Econometric Projections
TRY has re-appreciated in 2018H2 given reduced
concerns over global EM assets and lower oil prices.
The CBRT (Central Bank of Republic of Turkey) has kept
its policy rate (one-week repo auction rate) unchanged
at 24% in December 2018. Policy rate cuts cannot be
ruled out ahead of local elections in March 2019.
However, the reduced pressures on inflation dynamics
are still insufficient to expect change in monetary
policy. Earlier than-expected easing may create
renewed pressures on the USD/TRY, thus making the
CBRT extremely cautious over its decisions.
High interest rates should support the Turkish Lira in
the medium term, despite a sharp slowdown in
economic activity in 2019.
RiskMonitor Analysis
The aggregate Economic & Financial Risk rating slightly
deteriorated in 2018Q3 to 51.8–C. It is consistent with
the current rebalancing of the economy with gradual
improvement in external imbalances and less currency
concerns, thereby the aggressive tightening of the
Central Bank (CBRT) translated into activity contraction
(unavoidable recession in the near term).
The improvement in the Foreign Exchange Balance
conceals a higher liquidity risk. Despite the Turkish Lira
appreciation in 2018H2 (+16.5% against USD since Sept.
2018), the past depreciation has improved the
exchange rate competitiveness toward undervaluation,
but it also negatively impacts the forex reserves quality
(massive capital outflows owing to risk aversion).
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
Jan. 2019 6.3 16% 7.1 6.0
Mar. 2019 6.6 17% 7.3 6.2
Dec. 2019 7.4 31% 8.3 6.0
June 2020 7.4
Source: Consensus Inc.
*The divergence index does not include the divergence on
EUR/USD.
TAC ECONOMICS
www.taceconomics.com 15Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1
3. Methodology
This document and the analysis on currency country-risk assessment RiskMonitor. This tool is
projections are based on the combination of two based on non-linear relations between economic
different sets of quantitative tools, associated with variables and degree of specific imbalances, and
in-depth qualitative review and process of between such imbalances and degree and nature of
“challenging the models”. risk, and is based on datamining techniques that do
not require scenario construction on explanatory
A first set of quantitative tools uses traditional variable. RiskMonitor outputs including an Exchange
econometric equations relating nominal exchange Rate Risk Rating, the level of which is associated with
rates (against the USD or EUR depending on the a non-gaussian distribution of probability for the
monetary / fx regime adopted by local authorities or exchange rate. RiskMonitor also provides Early
de facto) with underlying macroeconomic variables Warning Signals for unexpected / systemic shocks,
usually considered as having a large impact on EM including on the currency value.
currencies: this includes notably growth differential
(with mature economies) and outlook, inflation and The econometric equations and RiskMonitor outputs
interest rates (including levels, changes and gaps are providing two different sets of probability
with US), sensitivity to overall risk appetite / aversion, distribution at the 18-month ahead horizon. The
and commodity or oil prices. Estimations are overall quantitative result and currency projection is
calibrated on a long period (at least early 2000s) in based on a mixed model combining the two sets of
order to capture as best as possible trends and probabilities with equal weighting.
underlying forces. The robust estimate is afterwards
associated with Monte Carlo simulations based on Finally, the quantitative results are commented, and
observed ranges for explanatory variables and sometime nuanced, by the more qualitative / policy
incorporating covariances across variables. driven analysis on currency development and
outlook.
The second set of quantitative measures is based on
outputs from TAC ECONOMICS’ proprietary tool for
Disclaimer
These assessments are, as always, subject to the disclaimer provided below.
This material is published by TAC ECONOMICS SAS for information purposes only and should not be regarded as
providing any specific advice. Recipients should make their own independent evaluation of this information and
no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our
consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this
information is believed to be reliable, it has not been independently verified by TAC ECONOMICS and
TAC ECONOMICS makes no representation or warranty (express or implied) of any kind, as regards the accuracy
or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising
in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views,
forecasts, or estimates are solely those of TAC ECONOMICS, as of this date and are subject to change without
notice.
TAC ECONOMICS
www.taceconomics.com 16Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1 Your contacts at TAC ECONOMICS Technical questions / hotline TAC ECONOMICS team is available for any economic, financial, technical questions and requests at the following e-mail address: hotline@taceconomics.com Customer relation For any question relative to your subscription, please contact us by e-mail at taceconomics@taceconomics.com Tel +33 (0)299 39 31 40 Web: http://www.taceconomics.com TAC ECONOMICS www.taceconomics.com 17
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