Quarterly Currency Outlook - Emerging Markets MarketQuants Research Quarterly - 2017 Q3 - tac economics
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Emerging Markets Quarterly Currency Outlook MarketQuants Research Quarterly - 2017 Q3
Completed on July 24, 2017 TAC ECONOMICS www.taceconomics.com
Quarterly Currency Outlook – EM MarketQuant Research 2017 Q3
Content
1. Key elements of background 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 Rubble - RUB .......................................................................................................................... 13
South African Rand - ZAR .................................................................................................................... 14
Turkish Lira - TRY................................................................................................................................. 15
3. Methodology.......................................................................................................................... 16
TAC ECONOMICS
www.taceconomics.com 3Quarterly Currency Outlook – EM MarketQuant Research 2017 Q3
1. Key elements of background for EM currencies
Our global scenarios describe commodity prices remained positively oriented over the past months.
moving back upwards over the coming months and US Though certainly not impressive by historical EM
administration delivering its fiscal boost, thus creating standards, aggregate industrial production has
a period of accelerating activity in mature economies accelerated (irregularly) since the troughs of early
and favorable external circumstances for emerging 2016 and the latest (more negative) readings are not
markets (EM). Indeed, international trade continues to enough yet to break the trend.
accelerate, in volume terms, overall monetary policies
The firming growth scenario is associated with more
in most EM remain loose and the effects of the rapid
uncertainties regarding inflation, though pressures are
2015-16 decline in interest rates are in now in full
limited over the short-term by the softness in
swing.
commodity prices and stronger exchange rates. This
In parallel, EM are not currently exhibiting worrying was accompanied by declining bond yields (in EM local
signs of overall exchange rate overvaluation, a critical currencies) suggesting no immediate pressure on
difference with 2011-13: they are therefore (on monetary policy makers. The research on inflation
average) much less sensitive to the modest points to a “transition period” where easing becomes
forthcoming rise in US interest rates, and capital flows more problematic though tightening is not yet
are not expected to revert substantially over the next required.
quarters. Associated with the trade acceleration and
Our 2-year forward looking Risk ratings have however
our assumption of stabilizing / increasing commodity
deteriorated from end-2015 to early 2017, hence
prices, this translates into a reversal in the overall EM
pointing towards progressively rising risk
balance of payments. IMF projections suggest that the
materialization next year. Including renewed
major decline seen since 2013 has reverted in 2016
pressures on EM currencies. A key stabilizing factor
pushing the balance of payment close to zero this year
remains however our underlying assumption of a
and in 2018.
broadly weaker US dollar against most currencies (and
TAC ECONOMICS Foreign Exchange Balance our models suggest so for the EUR/USD, though not
average on 10 key EM countries above current level except during short periods, i.e.
with a neutral range in-between 1.10 and 1.15 for
most of the next quarters.
Source: TAC ECONOMICS
Our positive cyclical view is supported by both
coincident and forward-looking indicators that have
TAC ECONOMICS
www.taceconomics.com 4Quarterly Currency Outlook – EM MarketQuant Research 2017 Q3
2. Detailed Currency Outlook
Summary tables
Exchange Rate Forecasts for December 2018
(month average against Euro)
Spot rate Mixture model
July 24, 2017 mode 75% confidence interval
Brazilian Real (BRL) 3.65 3.76 3.3 - 4.4
Chinese Yuan (CNY) 7.86 7.29 6.6 - 8.1
Indian Rupee (INR) 75.0 79.5 76.2 - 82.8
Indonesian Rupiah (IDR) 15 516 15 063 12 778 - 17 458
Korean Won (KRW) 1 299 1 256 1 092 - 1 424
Mexican Peso (MXN) 20.6 21.7 20.1 - 23.5
Polish Zloty (PLN) 4.24 4.29 4 - 4.5
Russian Ruble (RUB) 69.9 67.0 58.7 - 76.6
South African Rand (ZAR) 15.1 17.3 15.9 - 18.6
Turkish Lira (TRY) 4.14 4.0 3.4 - 4.8
Cross-Rates Forecasts for December 2018
(month average)
BRL CNY INR IDR KRW MXN PLN RUB ZAR TRY
USD 3.39 6.57 71.6 13 570 1 132 19.5 3.86 60.4 15.6 3.60
EUR 3.76 7.29 79.5 15 063 1 256 21.7 4.29 67.0 17.3 4.00
BRL 1.94 21.1 4 006 334.0 5.77 1.14 17.8 4.60 1.06
CNY 0.52 10.9 2 066 172.3 2.98 0.59 9.19 2.37 0.55
INR 0.05 0.09 189.5 15.8 0.27 0.05 0.84 0.22 0.05
IDR 0.00 0.00 0.01 0.08 0.00 0.00 0.00 0.00 0.00
KRW 0.00 0.01 0.06 12.0 0.02 0.00 0.05 0.01 0.00
MXN 0.17 0.34 3.66 694.1 57.9 0.20 3.09 0.80 0.18
PLN 0.88 1.70 18.5 3 511 292.8 5.06 15.6 4.03 0.93
RUB 0.06 0.11 1.19 224.8 18.7 0.32 0.06 0.26 0.06
ZAR 0.22 0.42 4.60 870.7 72.6 1.25 0.25 3.87 0.23
TRY 0.94 1.82 19.9 3 766 314.0 5.43 1.07 16.8 4.33
TAC ECONOMICS
www.taceconomics.com 5Quarterly Currency Outlook – EM MarketQuant Research 2017 Q3
Brazilian Real - BRL
We expect the currency to slightly depreciate given the TAC ECONOMICS Projections
ongoing rise in US real bond yields, which threatens to (Mixed econometric and RiskMonitor approach)
undermine EM FX in general, it has begun to head in the
Spot Dec. June Dec.
US's favor in recent months, which is negative for the
July 24 2017 2018 2018
BRL. However, the Brazilian Real would remain close to
BRL 3.40 against the USD, equivalent to BRL 3.76 against EUR/BRL 3.65 3.78 3.74 3.76
the Euro.
Econometric Projections
Banco Central do Brasil continues to ease its monetary
policy this year, though with a more moderate path (cuts
of 375pts since Dec. 2016 to 10.25% in May 2017), in line
with falling inflation (+3.6% y/y in May 2017 after +4.1%
in April). Hence, the currency has registered downward
pressure since mid-May (-7.4% to 3.3 USD/BRL). The
ongoing rise in US real bond yields, which threatens to
undermine EM FX in general, should be globally negative
for the BRL.
RiskMonitor Analysis
The Economic & Financial Risk rating has declined
recently (to 49.3C), notably owing to a large rebound of
the real economic pressure on the Cyclical Balance. In
relation with the overvaluation of the Brazilian Real
(BRL), the Watch List Indication confirms the significant
depreciation / volatility ahead due to US Fed's rate hiking
cycle. A more aggressive tightening could lead to a surge
in the dollar relative to EM FX generally. However, on the
Foreign Exchange Balance, the reappreciation of the Real
until Feb. 2017 has led to the progressive deterioration
of the exchange rate competitiveness; the currency
registers a relative overvaluation of about +15% against
its main competitors in 2017Q1. Meanwhile, the
potential for recovery in commodity prices has acted as
tailwind to the Real. The recent rally in iron ore and
soybean prices providing a boost to Brazil's terms of
trade (USD 7.6bn trade surplus in May followed by
USD 7.2bn surplus in June) should be supportive of the
BRL; though this can lead to deterioration of the
exchange rate competitiveness in the near term.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 3.60 9.1% 3.74 3.42
Sept. 2017 3.60 12.5% 3.76 3.31
June 2018 3.70 13.7% 3.93 3.42
Dec. 2018 3.88
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 2017 Q3
Chinese Yuan - CNY
Our tools signal a WatchList Indication on the Chinese TAC ECONOMICS Projections
exchange rate; with a period of high vulnerability (Mixed econometric and RiskMonitor approach)
starting in 2017Q3. However, the expected cyclical
Spot Dec. June Dec.
stabilization for 2017 in China and the likely
July 24 2017 2018 2018
depreciation of the US Dollar would lead to the easing
of pressures on the Yuan. EUR/CNY 7.86 7.34 7.31 7.29
The combination of approaches expects the Yuan to
appreciate against the Euro, then to stabilize close to
EUR/CNY 7.3.
Econometric Projections
The econometric model takes into account changes in the
implicit basket partially announced by the Chinese
authorities over the past years (with major currencies
selected by our models being EUR, USD, JPY and KRW).
The expected depreciation of the US Dollar and the
Japanese Yen, and appreciation of the Euro would lead to
a break in the trend depreciation of the Yuan observed
since 2015. The Chinese currency has indeed stabilized
against the US Dollar during 2017Q2 and is now expected
to slightly appreciate to USD/CNY 6.7, equivalent to
EUR/CNY 7.3.
RiskMonitor Analysis
The Economic & Financial Risk rating has improved in
2017Q2 (to 40.6-C), thanks to the improvement on the
Cyclical Balance. However, the progressive recovery of
our leading index of domestic demand is consistent with
a relative stabilization of cyclical growth over the short-
term, accompanied by limited inflationary pressures.
Meanwhile, the country remains in the domestic credit
risk area on the Banking System Balance (excessive
domestic leverage) and in the unsustainable
overvaluation area on the Foreign Exchange Balance, due
to a deterioration in forex reserves quality. This
vulnerability is confirmed by the Watch List Indication on
Exchange Rate. We believe that China will aim to keep
the currency in a fairly tight grip to avoid a too big rise in
USD/CNY to cause a protectionist response from the US,
which could possibly further deteriorate the forex reserve
quality.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 7.58 3.9% 7.68 7.38
Sept. 2017 7.63 4.1% 7.74 7.43
June 2018 7.81 16.0% 8.55 7.30
Dec. 2018 7.84
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 2017 Q3
Indian Rupee - INR
The Indian Rupee has been very resilient among major TAC ECONOMICS Projections
EM currencies over the past quarters, but this has (Mixed econometric and RiskMonitor approach)
eroded its competitiveness and mechanically increased
Spot Dec. June Dec.
its vulnerability. However, stabilizing inflation, steady
July 24 2017 2018 2018
monetary policy and improving economic performance
remain supportive factors, resulting in a modest EUR/INR 75.0 76.5 76.1 79.5
depreciation of the currency, just below USD/INR 70 or
slightly above EUR/INR 75 in 2018.
Econometric Projections
After a significant appreciation in 2017Q1 (+5% against
USD), the Indian Rupee has stabilized recently (around
64.5 USD/INR in May-June). Bouts of mild depreciation
could be triggered by shifts in global investor risk
appetite and the return of inflationary pressures. We
think excessive strength of the Indian rupee (INR) is
unfavorable as the currency is too far from its
fundamentals.
RiskMonitor Analysis
The Economic & Financial Risk rating has been relatively
stable in the last 3 quarters (at 39.8-B in 2017Q2). On the
Cyclical Balance, the demonetization of high-
denomination currency notes (86% of cash) had a
significant impact on the money supply dynamics, as
evidenced by the massive but temporary fall in the
monetary pressure; while the solid rebound of the real
economic pressure augurs an improvement in the
momentum of domestic demand in the coming quarters.
On the Foreign Exchange Balance, the exchange rate
competitiveness has slightly improved in 2017Q1, as
others emerging markets’ currencies have reappreciated
at a higher pace than the Indian Rupee in line with
improving economic outlook and revived global risk
appetite. Despite of a modest overvaluation (about
+10%), the Central Bank (RBI) has been comfortable in
managing forex reserves (USD 355bn) to limit
depreciation risks in case of high financial volatility as this
suggests that rising foreign reserves reflect a slower pace
of appreciation in the INR.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 71.2 3.3% 72.4 70.1
Sept. 2017 71.5 5.4% 73.8 70.0
June 2018 72.9 9.5% 77.2 70.3
Dec. 2018 74.2
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 2017 Q3
Indonesian Rupiah - IDR
Econometric and RiskMonitor models show divergent TAC ECONOMICS Projections
projections for the Rupiah up to 2018-end. (Mixed econometric and RiskMonitor approach)
Overall, the substantial overvaluation of IDR should Spot Dec. June Dec.
weigh on the currency and trigger a modest July 24 2017 2018 2018
depreciation toward EUR/IDR 15 000 in 2018.
EUR/IDR 15 516 14 994 14 652 15 063
Econometric Projections
Indonesian Rupiah has traded within a relatively narrow
band against the USD since the start of the year as Bank
Indonesia (BI) has been actively intervening in the foreign
exchange market to prevent appreciation of the
currency. Limited inflationary pressures, stabilization of
oil prices and low volatility (limited pass-through effects)
should support the Rupiah over the next few quarters.
RiskMonitor Analysis
The Economic & Financial Risk rating has edged down at
a rather positive level (39.3-B in 2017Q2). Moreover,
declining risk ratings over longer horizons (notably on the
exchange rate risk) suggest that short-term operational
vulnerabilities are concentrated on corporates heavily
indebted in foreign currency. On the Foreign Exchange
Balance, the exchange rate competitiveness has further
deteriorated in 2017Q1 (overvaluation of more than
+20% against main competitors); associated with
insufficient forex reserves quality, the latest position
indicates a risk of depreciation in the medium term.
However, BI’s deputy governor Sugeng confirmed in
early-May that the central bank has been limiting Rupiah
strength in a bid to preserve its export competitiveness,
and also evident from the fact that foreign reserves
climbed to a multi-year high of USD 122bn at the end of
May. With US real bond yields likely to face continued
downward pressure from declining long-term rate
expectations, upside pressure on the Rupiah is likely to
continue over the coming months; but we expect the
central bank to maintain a tight grip on the currency and
thus hold a neutral or depreciating view.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 14 733 2.6% 14 968 14 585
Sept. 2017 14 779 3.6% 14 970 14 436
June 2018 14 989 10.3% 15 994 14 449
Dec. 2018 15 120
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 2017 Q3
Korean Won - KRW
The Korean Won has modestly reappreciated against TAC ECONOMICS Projections
the USD over the past months, a result of favorable (Mixed econometric and RiskMonitor approach)
trade and growth readings, though it remained
Spot Dec. June Dec.
vulnerable to worries related to China or North Korea.
July 24 2017 2018 2018
As long as the global cycle does not interrupt South
Korea’s performances, the currency should remain EUR/KRW 1 299 1 259 1 243 1 256
strong against the USD, and almost stable against the
Euro from early July’s levels (projection of EUR/KRW at
1,256 at the end of 2018).
Econometric Projections
With a stable inflation outlook (below 2% annually and
steady economic growth), the Korean Won is expected to
remain firm with a target at KRW 1,090 against the USD
at the end of 2018. As financial volatility is a significant
factor in the model, any widespread financial
deterioration or (by proxy) a major escalation in
geopolitical threats could create temporary bouts of
weaknesses.
RiskMonitor Analysis
South Korea’s Economic & Financial Risk rating continued
to improve (41.2-C in 2017Q2), as a result of better
Cyclical and Foreign Exchange Balances. For the latter, a
technical “rebasing” of Korea’s foreign exchange
competitiveness index has reflected the country’s
continuous improvement in trade performances and
brought the index back to neutral. The Cyclical Balance
highlights accelerating domestic momentum in the short
term, thanks to the confidence boost post-Presidential
election and despite higher geopolitical threats, though
vulnerabilities remain in longer term related to spillover
effect of a potential reversal in the global cycle (US /
China). Risk measures therefore suggest very limited risks
of sustained depreciation, a possible short-term
appreciation though low forex reserves quality implies
potential volatility of the currency.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 1 249 4.9% 1 278 1 217
Sept. 2017 1 254 7.9% 1 300 1 201
June 2018 1 271 13.9% 1 335 1 158
Dec. 2018 1 280
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 2017 Q3
Mexican Peso - MXN
After an episode of large overshooting (around US TAC ECONOMICS Projections
Presidential election) and complete corrective reversal (Mixed econometric and RiskMonitor approach)
during 2017Q1, the Mexican Peso is now expected to
Spot Dec. June Dec.
register a modest depreciation towards USD/MXN 19.0
July 24 2017 2018 2018
in 2018 (EUR/MXN 21.7 at the end of 2018).
EUR/MXN 20.6 21.1 21.4 21.7
Our Econometric and RiskMonitor projections are
diverging again, with RiskMonitor putting more weight
on the (large) remaining competitive undervaluation of
the currency, while the equation suggests that a less
benign international environment and mediocre
domestic performances would feed depreciation
pressures.
Econometric Projections
The Mexican Peso is highly sensitive to growth
performances, inflation and “exogenous” factors such as
financial volatility and oil prices. After the overshooting
episode around the US Presidential election and
subsequent reversal, the currency equation shows that
mediocre growth and unimpressive price readings are
going to weigh down on the exchange rate, in a context
of higher financial volatility and only modestly higher oil
prices. The econometric model continues to anticipate a
medium-term level for the Peso around USD/MXN 19.0.
RiskMonitor Analysis
Mexico’s Economic & Financial Risk rating has been
stable at a favorable level (33.2-B in 2017Q2), reflecting
however two opposing movements, a modest
improvement on the Foreign Exchange Balance
compensated by a symmetric deterioration for the
Liquidity Balance. Both suggest that forex reserves
movements are critical and not yet fully supportive, while
the competitive advantage shown by the MXN at current
levels remains massive. This suggests a longer-term
support for the exchange rate.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 20.8 6.6% 21.5 20.1
Sept. 2017 20.9 9.8% 21.9 19.8
June 2018 21.3 10.8% 22.6 20.3
Dec. 2018 21.3
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 2017 Q3
Polish Zloty - PLN
Econometric and RiskMonitor tools converge in TAC ECONOMICS Projections
suggesting a broadly stable exchange rate against the (Mixed econometric and RiskMonitor approach)
Euro over the next 18 months with end-2018 projected
Spot Dec. June Dec.
values at PLN 4.29.
July 24 2017 2018 2018
However, dispersion (i.e. uncertainty) is much higher in
EUR/PLN 4.24 4.30 4.29 4.29
RiskMonitor outputs, with a fatter tail for larger
depreciation, suggesting underlying vulnerability to
unfavorable news, either from domestic politics or from
exogenous events, though the likely strength of the EUR
against the USD and stronger EUZ growth will provide
substantial support.
Econometric Projections
Accelerating domestic growth and the associated
monetary tightening expected over the next 18 months
(+75bp expected for money market rates between Jul.
2017 and Dec. 2018), as well as the expected
strengthening of EUR/USD rate would counteract
potential pressure on the currency related to modestly
higher inflation and episodes of tensions within the
Eurozone (a key variable in our econometric model). The
results are a EUR/PLN exchange rate that would remain
broadly stable around 4.25-4.30 during most of the next
18 months, a level slightly stronger than the previous
econometric projections.
RiskMonitor Analysis
The Economic & Financial Risk rating has moderately
improved (to 40.5-C), in line with the progressive
strengthening on the Cyclical Balance, itself supporting
the view of progressively tightening monetary policy. On
the Foreign Exchange Balance, the Polish Zloty benefits
from a highly competitive valuation, but forex reserves
are more volatile and of lower quality, suggesting
potential volatility of the currency. In parallel, poorer
performances on the foreign Debt and Banking System
Balances are still weighing on the currency outlook.
Consensus Projections
end-of-period value against Euro
Mean Divergence Max Min
July 2017 4.20 3.7% 4.29 4.13
Sept. 2017 4.19 3.6% 4.25 4.10
June 2018 4.18 8.4% 4.30 3.95
Dec. 2018 4.17
Source: Consensus Inc.
TAC ECONOMICS
www.taceconomics.com 12Quarterly Currency Outlook – EM MarketQuant Research 2017 Q3
Russian Rubble - RUB
The 2017Q1 strengthening of the Russian currency gave TAC ECONOMICS Projections
way to stabilization and then depreciation in June as oil (Mixed econometric and RiskMonitor approach)
prices failed to recover, with EUR/RUB pushed rapidly
Spot Dec. June Dec.
to levels expected for end-2018. With an assumption of
July 24 2017 2018 2018
positive oil price reversal to 55-65$/bl in 2018 and
stable interest rates in Russia, further depreciation is EUR/RUB 69.9 64.5 65.2 67.0
unlikely over the next 18 months beyond occasional
bouts of higher volatility, with a target of EUR/RUB 67.0
at end-2018.
Econometric Projections
Our econometric model captures the large influence of
oil prices on the USD/RUB exchange rate: in this context,
the decline in Brent prices induce a depreciation from
RUB 56 to RUB 60 during June 2017. Our projection for a
movement back towards 55-65$/bl for oil, in a context of
stabilizing inflation and policy rates and the continuation
of growth acceleration, points to rough stability
compared to current levels. Taking into account the very
large historical dispersion on oil prices, the MC simulation
reveals an unusual flattish shape.
RiskMonitor Analysis
Russia’s average Economic & Financial Risk rating has
stabilized at a low level (33.4-B) during the last quarter
after a massive improvement since early 2016. The on-
going economic recovery (though moderate), persistent
current account surpluses and very large forex reserves
are providing continuous support. However, the RUB has
moved into a much less favorable exchange rate
competitiveness level, with a 15% overvaluation, thereby
entering the speculative overvaluation area in the
Foreign Exchange Balance. Overall, RiskMonitor outputs
are unusually “concentrated” with smaller tails than for
most currencies and pointing to a roughly stable
exchange rate against the Euro.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 63.3 7.6% 65.7 60.9
Sept. 2017 64.4 8.4% 66.6 61.2
June 2018 65.7 17.2% 68.7 57.4
Dec. 2018 66.3
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 2017 Q3
South African Rand - ZAR
The outlook for the South African Rand is the most TAC ECONOMICS Projections
uncertain among key EM currencies, as shown by the (Mixed econometric and RiskMonitor approach)
divergence between econometric and RiskMonitor
Spot Dec. June Dec.
outputs, and by the massive dispersion among
July 24 2017 2018 2018
forecasters. On one side, the improving forex liquidity
and potential support to bond markets through the EUR/ZAR 15.1 16.0 16.4 17.3
recent cut in policy rates, as well as positive reversal in
commodity prices, are substantial support to the
currency; conversely, persistent inflation, subdued
economic activity and increasing political challenges are
major risk factors.
This combination of opposing forces is likely to create
short-term gyrations, with however a depreciation
against the Euro, expected at ZAR 17.3 at end-2018.
Econometric Projections
The econometric projections are highly sensitive to the
respective changes in inflation on one side, commodity
prices on the other. Though this may be supportive in the
short run, the equation indicates a stronger depreciation
in 2018, with a USD/ZAR around ZAR 14.5 in 2018H1 and
ZAR 15.1 at end-2018. Any decline in inflation or pick-up
in commodity prices would limit the depreciation,
especially if the USD is broadly weaker.
RiskMonitor Analysis
Outputs from RiskMonitor models show that the
currency remains modestly undervalued on the Foreign
Exchange Balance; with a strengthening Liquidity
Balance, support for the currency comes from large
interest differential, even after the surprise cut by the
SARB on July as well as from potential improvement in
the Growth Balance as external deficits are expected to
decline. Overall, RiskMonitor would suggest a stability
against the Euro for most of the period ahead, though a
fatter tail on the depreciation side continues to highlight
potential vulnerabilities, that can be related to growing
political / confidence uncertainties.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 14.7 21.2% 16.7 13.6
Sept. 2017 15.0 28.9% 17.8 13.5
June 2018 15.3 41.5% 19.6 13.2
Dec. 2018 15.4
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 2017 Q3
Turkish Lira - TRY
The Turkish Lira (TRY) depreciated sharply until TAC ECONOMICS Projections
February 2017, inducing a substantial improvement in (Mixed econometric and RiskMonitor approach)
competitiveness and in exports. Combined with
Spot Dec. June Dec.
supportive domestic policies, economic growth has
July 24 2017 2018 2018
accelerated. In the short-term, this is providing support
to TRY’s current level, and the target against the EUR at EUR/TRY 4.14 3.9 4.0 4.0
end-2018 is almost stable (TRY 4.0). However, both
statistical outputs and political tensions suggest a high
degree of vulnerability during this “blind run” period.
Econometric Projections
Our econometric model for the TRY suggests that after
the large depreciation of 2017, the expected decline in
inflationary pressures (though modest), low international
financial volatility and strong export performances
should induce a broad stabilization of the currency
against the USD and hence a modest depreciation against
the EUR. Considering the volatile characteristic of
Turkey’s performances, the Monte Carlo simulations
reveal a rather flat Gaussian curve.
RiskMonitor Analysis
The Economic & Financial Risk rating has been stable in
the last quarter at a high level (57.3-C in 2017Q2). Poor
positions on the Fundamental Balances, except on the
Cyclical Balance, highlight high economic and financial
vulnerabilities; this is confirmed by the WatchList
Indication on the Economic Activity, suggesting a
potential for significant adjustment in GDP growth from
now to 2020Q1.
The rapid depreciation of the TRY up to Feb. 2017 has
improved the exchange rate competitiveness on the
Foreign Exchange Balance. However, low forex reserves
quality, related to substantial short-term fx funding of
large fx borrowing requirements, indicates that the
currency remains highly vulnerable to investors’
confidence, in a context of increasing political /
international uncertainties.
Consensus Projections
end-of-period value against Euro*
Mean Divergence Max Min
July 2017 3.90 4.8% 4.02 3.83
Sept. 2017 3.94 15.4% 4.41 3.80
June 2018 4.13 32.1% 4.96 3.64
Dec. 2018 4.10
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 2017 Q3
3. Methodology
This document and the analysis on currency The second set of quantitative measures is based on
projections are based on the combination of two outputs from TAC ECONOMICS’ proprietary tool for
different sets of quantitative tools, associated with in- country-risk assessment RiskMonitor. This tool is
depth qualitative review and process of “challenging based on non-linear relations between economic
the models”. variables and degree of specific imbalances, and
between such imbalances and degree and nature of
A first set of quantitative tools uses traditional risk, and is based on datamining techniques that do
econometric equations relating nominal exchange not require scenario construction on explanatory
rates (against the USD or EUR depending on the variable. RiskMonitor outputs including an Exchange
monetary / fx regime adopted by local authorities or Rate Risk Rating, the level of which is associated with
de facto) with underlying macroeconomic variables a non-gaussian distribution of probability for the
usually considered as having a large impact on EM exchange rate. RiskMonitor also provides Early
currencies: this includes notably growth differential Warning Signals for unexpected / systemic shocks,
(with mature economies) and outlook, inflation and including on the currency value.
interest rates (including levels, changes and gaps with
US), sensitivity to overall risk appetite / aversion, and The econometric equations and RiskMonitor outputs
commodity or oil prices. Estimations are calibrated on are providing two different sets of probability
a long period (at least early 2000s) in order to capture distribution at the 18-month ahead horizon. The
as best as possible trends and underlying forces. The overall quantitative result and currency projection is
robust estimate is afterwards associated with Monte based on a mixed model combining the two sets of
Carlo simulations based on observed ranges for probabilities with equal weighting.
explanatory variables and incorporating covariances
across variables. Finally, the quantitative results are commented, and
sometime nuanced, by the more qualitative / policy
driven analysis on currency development and outlook.
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 2017 Q3 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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