Goldman’s Weaker Dollar Call Adds to Emerging-Market Fervor

Emerging-market investors seem to have a lot going for them right now -- and the renewed weakness in the U.S. dollar is adding to the bullish mood.

MSCI Inc.’s index tracking developing-nation currencies climbed to a record on Friday as the dollar posted its biggest weekly drop in 2021, even as U.S yields rose. A measure of implied volatility fell to the lowest since July, underscoring optimism about a vaccination-led global recovery and the prospect of more U.S. stimulus.

“Global growth should be very strong over the next six months as the vaccination campaigns play out,” Goldman Sachs Group Inc strategists including Zach Pandl and Kamakshya Trivedi wrote in a note. “We expect global cyclical forces to dominate some degree of ‘U.S. outperformance’, resulting in dollar downside for most crosses.”

While the euro’s strength had driven most of the early weakness in the dollar, the yuan’s appreciation has been a more important factor since the second half of 2020, the strategists said. “Macro fundamentals for the yuan continue to look solid” and China continues to attract inflows from global investors drawn to the strong equity performance and currency’s low volatility, they said.

The Turkish lira is leading global currency gains this year, and economists expect the central bank to keep monetary policy tight on Thursday after inflation quickened for a fourth month in January. Policy makers in Indonesia will probably ease on the same day.

Listen more: EM Weekly Podcast: Reflation Trade; Divergence at Central Banks

Central Banks Decide

Bank Indonesia is expected to cut benchmark interest rates by 25 basis points, according to a majority of analysts in a Bloomberg survey
- Governor Perry Warjiyo appeared to flag such a move in testimony to parliament last week
- Firm balance of payments, including inflows into the local bond markets, and eight months of CPI below target create space for a cut
- The rupiah has strengthened since the last rates meeting, and Bank Indonesia will likely support the currency with rhetoric as well as intervention, should that be required
- A surprise hold could be marginally positive for the currency, according to a Bloomberg study
- Indonesia’s January trade balance recorded a larger-than-expected surplus on Monday
- Current-account data for the fourth quarter will be released on Friday, and should remain in surplus. The surpluses in the final two quarters of 2020 are the first since 2011, and create some space for Bank Indonesia to loosen monetary policy
Turkey’s central bank is expected to hold its one-week repo rate at 17%, according to most economists surveyed by Bloomberg; only three predict a 100-basis-point hike
- “The lira has rallied and reserves are rising, providing no reason to raise rates further,” according to Bloomberg Economics
- Derivatives traders pared their bearish bets on the lira for a fourth week in the five days through Friday, according to one-month risk reversals
- Governor Naci Agbal has pledged to keep policy tight after raising the benchmark interest rate by 675 basis points to 17% since his appointment in November

Events and Developments

Trading will probably be light at the start of the week, with China’s markets closed until Thursday and Taiwan reopening only on Wednesday
- Brazil and Argentina’s week will be shortened by the Carnival holiday
Hungary seeks to vaccinate 2 million people against the coronavirus by April with the help of Chinese-developed shots, while Venezuela received the first 100,000 doses of the Russian Sputnik-V vaccine.
Traders will be watching the Ukrainian hryvnia after the International Monetary Fund ended a remote review of its $5 billion loan program with Ukraine without clearing the next tranche because conditions haven’t been met
- President Volodymyr Zelenskiy said he will submit draft bills to improve the judicial system next week, and “insist” lawmakers debate them “quickly”
Ecuador’s bondholders will watch a recount of votes from the presidential election after market-friendly candidate Guillermo Lasso edged out environmental activist Yaku Perez for a spot in the runoff on April 11
- The nation’s debt bounced back late last week as Lasso overturned Perez’s initial lead, raising the prospect of a faceoff against socialist economist Andres Arauz
Ethiopia’s long-term foreign-currency debt rating was downgraded by S&P Global Ratings to B- from B, given a weak external balance sheet made worse by the pandemic
Qatar will hold a non-deal roadshow in Europe from Feb. 15-17, the U.S. from Feb. 22-24 and Asia from Feb. 25-March 1

Key Data

Thai fourth quarter GDP came in above expectations on Monday, supported by government stimulus and local demand
India’s January trade numbers will be released on Monday, and will likely show a large deficit
- The rupee was among the worst performers in emerging Asia last week, despite the benefits of the aggressive budget and rapid progress on vaccinations
Philippines December remittance numbers were published on Monday
- The amount of money repatriated by Filipinos abroad fell last year for the first time since 2001 as the pandemic upended the global job market
- Balance of payments figures for January are due Friday
- The peso broke the psychologically key 48-level against the dollar in early trading on Monday, after more than two months of apparent central bank resistance
China’s fourth-quarter current-account figures will be released on Friday
- Net foreign exchange settlements data for January will be closely watched after the very strong spike in corporate conversion rates in December
- It’s possible that improving conversion rates relative to the July-November period will contribute to yuan appreciation pressure
- The yuan closed up slightly on the week, as positive market pressure continued to meet resistance from the authorities
- Read more: Yuan Traders, and Why PBOC Mistrusts Their Bull Case: Macro View
South Africa’s January inflation probably accelerated from the previous year, data on Wednesday may show
- The rand was one of the best-performing developing-nation currencies last week
- Read more: From Global Pariah to Emerging-Market Proxy: The Rand Turns 60
- Listen: Speaking of EM: RenCap’s Robertson on the Rand’s 60th (Podcast)
Russia’s central bank will publish its monetary policy report on Saturday
- The regulator ended its monetary easing cycle as signs of a rebound from the pandemic added to inflationary pressures. Interest rates were kept on hold for a fourth straight policy meeting on Friday
- Russia is also due to publish January industrial production data on Monday that is set to show an improvement from a year earlier
A reading of Colombia’s fourth-quarter gross domestic product on Monday will probably flag an economic recovery, while remaining below pre-pandemic levels
- Economic activity in December, to be released the same day, is expected to show similar results
In Peru, a gauge of economic activity for December, to be released on Monday, will probably show a similar picture as growth gradually rebounds, according to Bloomberg Economics
- The nation’s fourth-quarter gross domestic product figures, scheduled for release on Thursday, should also show a recovery from the sharp contraction suffered amid the outbreak as lockdown measures loosen and external demand picks up

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Goldman’s Weaker Dollar Call Adds to Emerging-Market Fervor

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