Emerging Markets

July 4, 2014

By: Darren Viegas

Brazilian Real Falls To Two Week Low As Rouseff Gains In Poll

The Brazilian Real has advanced from a one week low even as a poll indicated that President Dilma Rouseff has gained support. The Real climbed to 2.2106 per dollar at the day’s close. The Brazilian central bank announced last year that it will extend daily support for the currency for another six months to curb inflation. To bolster the Real, the central bank has sold $198.9 million of currency swaps and extended the maturity on contracts worth $346.8 million. Central banker Alexandre Tombini says that Brazilian inflation will close the year within the target of 2.5%-6.5%. Rouseff’s backing rose from 34% to 38% in June.

From first glance this news looks somewhat concerning. As one trader said in the article, Traders are buying the real when it is weak to purposely ride up on the central bank’s backing. This has moved the real somewhat out of its normal trend. While it is good that Brazil is continuing to take measures against inflation, support for the economically unpopular Rouseff and an abnormal currency trend could prove to be future problems.

Moody’s Says South Africa Rating At Risk as Strikes Mount

South Africa is in economic danger yet again as miners and metal workers that started striking on July 1st are threatening to cost the country a downgrading. 220,000 metalworkers walked out on July 1st and may curb a third of output in manufacturing. This comes just after the five month Platinum and Palladium industry strike came to an end. Weak investment, exports and GDP growth will be the economic problems to fix in the near future, while fiscally the government must rein in its budget deficit and stabilize its debt metrics. Moody’s has been bearish on South Africa’s Baa1 credit since November 2011. S&P has downgraded the nation’s debt on June 12 to BBB-, the lowest investment grade. Finance Minister Nhlanhla Nene said on July 1st that the country is unlike to meet its 2.7% GDP growth this year because of the strikes. The National Union of Metal workers of South Africa will resume wage talks tonight, as they seek wage increases of 12%, compared to the 8% of what employers have offered.

This is extremely disappointing news. As the platinum industry strike came to an end, it seemed like there was a light at the end of the tunnel. But with this recent strike- it affecting a third of manufacturing- it does not look like South Africa can avoid a second subsequent contraction and recession. Hopefully policy leaders will be able to intervene quickly to ensure that this strike does not last as long as the platinum industry counter-part.

High Inflation Is No Match For Turkey’s Rate-Cutting Zeal

Turkey’s inflation has dropped by less than estimated in June. Analysts have said that this will not stop Govenor Erdem Basci from cutting rates even further. The decline in annual headline and core inflation will likely provide a justification to cut rates, according to the chief economist of Gedik Investment in Istanbul. The central bank cut its benchmark rate from 9.5% to 8.75% amid escalating government calls to boost investments through lower borrowing costs. This was a stark contrast to January, when policymakers doubled the rate to 10% to stem currency outflow (as I talked about in my project). Economic Minister Nihat Zeybecki said that that he “…expects the central bank to lead the market with its interest rate decision, not follow it”.

This news on Turkey’s inflation is a double edged sword. While lowering inflation and subsequently lowering benchmark rates will keep domestic citizens and the Prime Minister happy, this may upset foreign investors. If the US hikes interests rates faster than expected, there could be a possible Lira sell-off similar to the one in January.

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