Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week : USDRUB
Christopher Dembik
Head of Macroeconomic Research
Summary: In this edition, we focus on USD liquidity and the consequences for the RUB.
Contrary to what has happened in the past, the latest Fed easing coupled with ECB QE hasn’t had a positive effect on EM currencies. Over the past ten days, only three of the main EM currencies posted a positive performance against the USD: the INR, the PHP and the TRY. The Russian ruble limited losses with a drop of only 0.50%.
This counter-performance mostly results from over-positioning. Looking for yields in an abnormally low interest rate environment, investors have massively placed their funds in EM countries over the past ten years. In this context, easing in top tier economies isn’t the EM-positive trigger it used to be.
On the top of that, we expect that USD shortage will increase downward pressure on EM currencies in the coming months.
In the chart below, we have plotted the evolution of excess dollars in the US banking system, which serves as a proxy for USD liquidity, and the cross USDRUB (reversed). As of now, dollar shortage already stands at $445bn, and we estimate that it may reach an annualized peak comprised between $800-900bn in the coming months due to the expected ramp up of USD Treasury bill issuance.
As you can see, there is a strong negative correlation between USD shortage and the RUB (and other EM currencies). We consider the combination of negative risk sentiment towards EM, lower USD liquidity and, to a lesser extent, trade war will be negative for the RUB and will push the cross USD/RUB around 66.0 by the end of year. The evolution of oil prices, which has mitigated the impact of negative risk sentiment in the past, should play a limited role in the short term as oil remains in a range-bound market.
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