(29 October 2019 ) DAILY MARKET BRIEF 2:EM currencies driven by global and local factors

The still unresolved trade tensions between the US and China, slowing global growth and central bank easing continue to drive emerging market (EM) currencies. In its latest update of the asset class, CIO is looking what's in store for Russia, Brazil and South Africa.

Global yields are likely to continue to support EM currencies for the time being, even though the asset class is expected to swing, which CIO strategist Jonas David attributes to "the vagaries of the trade conflict and expectations for the global growth outlook". Meanwhile, country-specific drivers will impact how individual currencies will perform, he adds.

In the case of the Russian ruble (RUB), one such trigger was the Russian central bank's recent 50 basis points (bps) rate cut to 6.5%, which according to David was at the upper end of market expectations. Having said this, the market reaction was rather muted. As inflation is on a downward trend and could undershoot the bank's 4% target, policymakers still have room to ease in the current environment of subdued growth, the strategist explains.

For the coming months, he expects the ruble to trade around current levels, with an appreciation bias toward USDRUB 63 in the medium to long term. Key factors to watch include global growth and monetary policy, oil prices, US sanctions, geopolitics, domestic activity, and monetary policy.

While the recent rate cut has lowered the interest rate attractiveness of the Russian ruble somewhat, CIO still like long RUB positions against the USD and the EUR over a six-month horizon due to the Russian economy's sound fundamentals, like the country's current account surplus.

When it comes to the Brazilian real (BRL), David considers the recent pension reform as a "major milestone in the reform agenda", which should result in savings of 800 billion real over the next 10 years. With the pension reform passed, the focus moves to growth dynamics. "We believe the first signs of economic recovery are on the horizon and that the consensus growth expectation of 2% for 2020 would be a respectable achievement," says David.

CIO expects the Brazilian central bank to cut its policy rate by another 50 bps 5% when it meets on Wednesday. In the coming months, it expects USDBRL to trade around 4 amid volatility.

For South Africa, Wednesday is also a key date, with the Medium-Term Budget Policy Statement, which is expected to include details on the government's plans to address the ballooning budget deficit and the rising debt-to-GDP ratio, due to be released. Moreover, US rating agency Moody's may publish its updated country view at any time. CIO expects the rand to weaken toward USDZAR 15 by year-end.

By UBS