A quick update to the post from a little under a month ago on the Troubled Three – Brazil, Turkey and South Africa (here).
At the time I argued that the fundamentals suggested a further weakening in these currencies, and that from a trading perspective, the momentum was supportive. Over the past month an equal-weighted basket of the BRL, TRY and ZAR weakened another 6.5%, with BRL the worst performer, followed by TRY and ZAR.
The further depreciation reflected events in each of these countries and beyond, and has provided further momentum to those looking to go short the currencies. Taking them in turn:
- Inflation accelerated to 9.6% in July, up from 8.9% in June. The highest inflation print since 2003. COPOM do not appear to be making much of a dent, despite 14.25% Selic rate.
- Composite PMI fell to 40.8 in July, the lowest reading on record
- COPOM sort of hinted that the hiking cycle might be coming to an end (although their pronouncements are notoriously difficult to read).
- The latest estimate of the fiscal cost of lending subsidies to BNDES has ballooned to R$ 184bn over the coming decades, despite the cessation of new loans earlier this year.
- Moody’s downgrade Brazil to one notch above junk, although with a stable outlook (many feared it would be with a negative outlook).
- Political pressure has increased further on Dilma, with mass demonstrations and an abysmal approval rating of just 8%.
- The fallout from the corruption scandal rumbles on, with the big unknown being whether Dilma (who was Chair of Petrobras at the time) will be indicted.
- Months have passed since the parliamentary elections and still no coalition govt has been formed. Talks collapsed last week and the acting PM has now called for fresh elections. New elections might deliver little change, forcing further coalition talks, or they might see the AKP gain a clear majority again. Neither prospect is good, with the former creating more uncertainty and the latter likely to see President Erdogan gain executive powers.
- Turkey’s military involvement in Syria (ISIL) and Iraq (PKK) has increased, with the latter particularly concerning for domestic stability.
- The CBRT left rates unchanged today (18th Aug), and published a rather bizarre document aimed at explaining how they plan to simplify the monetary policy framework going forward. It did not (see here).
- On the plus-side, inflation, the current account and IP all came out a bit better than expected this month.
- Not so much in the way of negative domestic news, other than a far worse than expected trade balance in June. SARB hiked rates as expected and inflation was actually weaker than expected.
- Further declines in commodity prices have impacted sentiment around the EM commodity exporters, including Brazil and South Africa.
- The Yuan depreciation (my early take on it here) acted as a general risk-off catalyst for EM, the Troubled Three, and particularly Asia ex-Japan (eg MYR has fallen sharply, although domestic factors are at play there too).
- Increased confidence of Fed lift-off in September has added to fears of the impact on EM currencies.
There are no doubt more things I could have highlighted, but the list above supports the continued weakening in these currencies. They are yet to go parabolic, but there is a chance that some or all will. It’s worth having some skin in the game to try to catch it, even if the carry is painful.