Outlook of foreign exchange market in 2022： Monetary policies of major central banks in emerging market countries continue to differentiate.
Xinhua Finance, Beijing, January 6 (Cui Kai) The world economy is gradually recovering from the huge impact of the new crown pneumonia epidemic. However, due to limited comprehensive national strength and financial support and insufficient vaccine coverage, the economies of some emerging market countries have still not been able to get out of the shadow of the epidemic. As the Fed speeds up the pace of reducing its bond purchases and the expectation of raising interest rates gradually heats up, emerging markets are facing a "worse" dilemma.
In 2022, the world economic development will fully enter the recovery stage after the epidemic. However, the geopolitical, economic and financial environment and other influencing factors will be further amplified. The uncertainty of the economic growth of the world’s major economies will continue to exist, and the economic activities of developed countries and emerging market countries will also show a trend of differentiation. However, the IMF predicts that the economies of emerging markets and developing economies will grow by 5.1% in 2022, which will still be higher than the global average growth rate. It can be seen that opportunities and challenges coexist in emerging market countries.
In 2021, the central banks of most emerging market countries have stepped into the tide of raising interest rates.
Since March 2021, among the 21 emerging market countries and regions in MSCI Emerging Markets Index, most central banks have stepped into the interest rate hike tide, and have been "forced" or taken the initiative to raise interest rates. In order to curb high inflation, South American economies have frequently raised interest rates. Asian economies have benefited from China’s strong economic growth and are not eager to follow suit.
(1) South American economies frequently raise interest rates.
On March 17th, Brazil’s central bank raised the benchmark interest rate, which has been maintained for six years, from 2% to 2.75%, which started a new cycle of interest rate increase. On May 5 and June 16, Brazil’s central bank raised interest rates by 75 basis points respectively, raising the benchmark interest rate to 3.5% and 4.25%. On August 4 and September 22, the Brazilian central bank raised interest rates by another 100 basis points respectively, raising the benchmark interest rate to 5.25% and 6.25%; On October 27th, Brazil’s central bank raised interest rates by another 150 basis points, raising the benchmark interest rate to 7.75%, the largest single rate increase in nearly 20 years. Even so, Brazil’s annualized inflation rate has reached nearly 11%, far exceeding the inflation target set by the Brazilian central bank.middleThe value is 3.75%.
Figure: Consumer Price Index (CPI) of Brazil
In addition, the Chilean central bank raised the benchmark interest rate by 125 basis points to 4% for two consecutive times; Both the Mexican central bank and the Peruvian central bank raised their benchmark interest rates for five consecutive months during the year, to 5.5% and 2.5% respectively; Colombia’s central bank raised its benchmark interest rate to 3%. Other countries in South America have also raised the benchmark interest rate in different degrees.
(2) The Russian central bank raised interest rates by 425 basis points during the year.
The Russian central bank raised interest rates by 425 basis points during the year. In mid-December, the Russian central bank announced the seventh interest rate hike this year, raising the interest rate to 8.5%. In the first three quarters of this year, Russia’s real GDP increased by 4.6% year-on-year, and the economy got rid of the recession. Judging from Russia’s economic situation, high inflation, strong economy and low unemployment rate will prompt the Russian central bank to continue to raise interest rates in 2022.
Figure: Russian Consumer Price Index (CPI)
(3) Asian central banks are in no hurry to act.
At present, the recovery speed of Asian economies is different, but several major economies have shown a rapid recovery trend: South Korea, Indonesia, China and Japan have achieved 7-8% economic growth; Malaysia, the Philippines, India and Singapore achieved double-digit growth. China, South Korea and Viet Nam have successfully recovered their economic vitality to the pre-epidemic level. However, in 2021, the currencies of emerging markets as a whole showed a trend of depreciation, and even some national currencies showed signs of crisis.
In 2021, the Bank of China will continue to maintain a prudent monetary policy, be flexible and moderate, and maintain a reasonable and abundant liquidity. Increase the weakness of the real economy such as small and micro enterprises and manufacturing industries.linkSupport, flexibility and structural characteristics are more prominent. Supported by China’s economic boost and monetary policy, RMB performed strongly in 2021. CFETS RMB exchange rate index shows that RMB soared by more than 8% in 2021, slightly lower than the historical record set in November 2015.
Figure: CFETS RMB exchange rate index
Since March 2020, the Bank of India has been promoting economic stability and growth with loose monetary policy, and will continue to maintain the interest rate level and loose monetary stance in 2021. Although, India’s economic growth this fiscal year is expected to reach more than 9.5%. However, the Bank of India believes that due to the spread of COVID-19 mutant virus, the world economic growth prospects are facing uncertainty. At the same time, due to the epidemic situation in India and the tightening of related prevention and control measures, the country’s economic activities willinevitableAffected, India’s sustained economic recovery is also facing certain uncertainties. India’s unprecedented trade deficit and the policy differences between the Bank of India and the Federal Reserve made Indian Rupee the worst performing Asian emerging market currency in the fourth quarter of 2021. The depreciation of Indian Rupee may support exports, but it will bring the risk of imported inflation, and it will make it more and more difficult for the Indian central bank to keep interest rates at historically low levels. The latest data shows that India’s wholesale price index rose to 14.23% and retail price index rose to 4.91%.
Figure: USD/Indian Rupee chart.
(5) The Turkish central bank does the opposite.
Turkey is the most maverick among emerging market countries. Since the failure of the Turkish military coup in July 2016, Turkey has been repeatedly sanctioned by the United States in economic and trade fields, the Turkish economy has deteriorated sharply, the inflation level has remained high for many years, and the Turkish lira has been under the pressure of depreciation. In order to curb inflation, the Turkish central bank announced on March 18th that it would raise the benchmark interest rate from 17% to 19%. Subsequently, Turkish President Erdogan dismissed the then central bank governor abal. As soon as the news came out, the Turkish financial market fluctuated violently and all kinds of financial assets were sold off. During abal’s less than five months in office, the Turkish central bank raised the benchmark interest rate by 875 basis points to 19%. During the same period, the exchange rate of Turkish lira against the US dollar rose by nearly 20% from the historical low, and the exchange rate of Turkish lira against the euro rose by more than 15%.
On September 23rd, the Turkish central bank unexpectedly lowered the benchmark interest rate by 100 basis points to 18%. Although Turkish President Erdogan has repeatedly expressed his position that interest rates must be cut in a high inflation environment, the unexpected interest rate cut by the central bank has triggered a sharp fall in the Turkish lira exchange rate. The Turkish lira once fell to 8.7537 against the US dollar, close to the historical low of 8.88 set in June.
Erdogan is a staunch supporter of monetary easing. He firmly believes that low interest rates and low inflation can be achieved, and whoever does not cooperate will be fired. Under the pressure of Erdogan, the Turkish central bank cut interest rates for four consecutive months, cutting the benchmark interest rate by 500 basis points to 14%. After the announcement of the resolution, the Turkish lira exchange rate hit a new low, and the US dollar broke through the 15 mark against the Turkish lira. The deepening of Turkey’s currency crisis prompted the country’s central bank to directly intervene in the market five times in December, selling dollars to support its plunging local currency. However, on December 20th, the Turkish lira hit a record low of 18.4 against the US dollar, with a depreciation of 60% during the year. Later, after Erdogan announced a plan to encourage Turks to hold the lira again, the Turkish lira exchange rate rebounded sharply from the collapse trend in the past few months and recovered some lost ground. However, most Wall Street investment institutions are still convinced that the Turkish lira cannot completely get rid of the decline. The Turkish government chose to "insist" on cutting interest rates sharply to stimulate economic growth, and the final result would be "counterproductive".
Figure: USD/Turkish lira chart
After this year’s continuous intervention, the Turkish central bank’s foreign exchange reserves have been reduced by 100 billion US dollars; If the continuous swap arrangement between banks and allied governments amounting to $63 billion is deducted, the reserves of the Turkish central bank are actually deeply negative. Analysts warned that if the lira’s rally fails and reverses, the plan may increase public debt, erode foreign exchange reserves and further trigger inflation.
Opportunities and challenges coexist in emerging market countries in 2022.
At present, the economies of emerging market countries are growing rapidly, but the financial markets are fragile. During the outbreak of the epidemic, the loose monetary policy of the central banks of major developed economies made the global inflation continue to rise, and the prices and stock markets of emerging market countries were greatly pushed up, and they were "forced" to raise interest rates in response to high inflationary pressures. Obviously, the time of the loosest global liquidity has passed. followFederal ReserveWith the reduction of bond purchases and the tightening of monetary policies by central banks in major developed economies, global liquidity has gradually entered a tightening cycle.
The shift of the Fed’s monetary policy has started to trigger spillover risks, and the tightening of liquidity will bring new shocks to emerging market countries. Some emerging market countries will face the bursting of financial market bubbles and capital flight, as well as the corresponding currency depreciation and financial crisis. Once the Fed enters the interest rate hike cycle, the impact of this spillover risk will be more direct and fierce in the future.
According to the data of the Institute of International Finance, in late November, since the market turmoil caused by the epidemic in March 2020, non-residents’ capital flowing into emerging market assets except China was negative for the first time. In this regard, Brooks, chief economist of the International Finance Association, said: "The willingness of investors to contact emerging markets has dried up." He added, "This is not just a case like Turkey. Turkey’s central bank insisted on cutting interest rates despite the sharp rise in inflation, which led to the sharp depreciation of the country’s currency in recent weeks. This reflects a broader problem, which is the lack of growth in emerging markets. "
Some analysts believe that the global economy may be more difficult in 2022 than in 2021. In addition to the structural challenges faced by global economic transformation, it is also affected by other risk factors, including efficiency loss, price negative feedback and credit crunch in the post-epidemic period, which constitutes the headwind of global recovery. Major research institutions predict that the global economy will continue to recover in 2022, but after the strong rebound of the global economy in 2021, the economic growth rate will further slow down in the next two years. Inflation is still the biggest stumbling block in the sustained global recovery, and the viscosity of inflation is likely to be seriously underestimated, and the global economy is facing the risk of stagflation.
In 2022, the external shocks faced by some emerging market economies increased, and the economic growth differentiation became increasingly obvious. Emerging market countries are worried about the flow of funds to the United States because the Fed’s interest rate hike is expected to heat up gradually. It is expected that the central banks of major emerging market countries will continue to raise interest rates, and most Asian central banks will join the ranks of raising interest rates, except those of Japan and China. Most emerging market countries are facing financial, debt and inflation risks, and the strong drive of commodities will be further weakened. Among the currencies of major emerging market countries, Thai baht, Peruvian new sol, Philippine peso and Korean won are less risky; The risks of Indian Rupee and Indonesian rupees are relatively controllable; Russian ruble, South African rand, Brazilian real, Turkish lira and other currencies are still facing greater risks.
In 2021, the performance of emerging market assets was poor, highlighting that the economic growth rate of emerging market countries failed to keep up with the pace of developed countries. However, 23 emerging market countries eased the impact of inflation by raising interest rates and improved the real return on assets. At the same time, the Asian regionsupply chainThe bottleneck is obviously easing, which also reduces the pressure of rising prices. According to the prediction of Wall Street investment banks, in 2022, the stocks, bonds and currencies of emerging markets will rise in the second half of the year. Most Wall Street investment banks are optimistic about China stock assets and Polish, Czech and Hungarian local currency bond assets.existThe performance of.
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