Central Banks Decision Presents Inevitable Market Risk

People's Bank of China front view

The annual National People’s Congress of China will start on Friday. Congress will likely hold back the volatility for the developing –nation currencies despite the prospect of another dispute between Beijing and Washington.

JP Morgan Chase & Co. monitors the market trend in the past three weeks and measures the impact of the volatility decline while the People’s Bank of China assures that they will take necessary measures to secure a calm yuan-trading environment during the meeting.

Somewhere else, central banks in Africa, Turkey, Indonesia, and Thailand are predicted to cut interest rates again. They are likely to reduce carry-trade returns from investments in their currencies.

Distressed-debt levels rise across developing countries. In this situation, Argentina may officially default if the South American country cannot reach the $65 billion restructuring deal. The huge restructuring deal is a deal with bondholders and is due on Friday.

Trieu Pham is an emerging market strategist in ING Groep NV in London. Pham said that there are still many undeniable risks out there.

The market strategist also added that he is still concerned about external vulnerabilities of an emerging market. He said that these vulnerabilities would gain the spotlight again if EM currencies come under pressure.

The Federal Reserve issued a warning on Friday. The warning says that stock and other asset prices could undergo significant declines as the coronavirus pandemic deepen.

Chairman Jerome Powell called last week, asking for more government action. The purpose of his call is to prevent lasting economic harm from the coronavirus. Powell will testify before Congress on Tuesday.

Yaun’s Stability, Quantity of Rate Cuts and Argentina’s New Proposal

Investors will look for China’s Congress to signal a spur boost of the annual meeting. An offshore yuan rise on five occasions was seen in the past seven annual meetings, and the official fixing remained stable. The currency’s 30-day volatility fell the lowest last week since January.

South Africa’s Reserve Bank is foreseen to cut its policy by 50 basis points. This cut records 3.75% on Thursday. This is according to the median estimate of the economist in a Bloomberg survey. Forward-rate agreements are more dovish. The pricing in this is almost 60 points basis.

Since the start of the coronavirus-related sell-off in March, the central bank has already dropped the repo rate by 200 basis points. Governor Lesetja Kyanyago said earlier this month, and it has more opportunity as inflation expectations disappear.

Figures surpassed investors’ expectations as a larger-than-expected rate cut of one percentage point appeared in April. Turkey’s central bank decided to cut the one-week repo rate by another 50 basis points to 8.75% based on the April figure.

Lower oil prices and slower economy cool down inflation, and policymakers should expect challenges to ease. Experts believed that unstable lira might count in favor of caution. On Tuesday, the central bank of Indonesia will lower its benchmark by 25 percent.

In the bank’s view, rupiah will remain undervalued. The bank also pledges to support both the nation’s currency and bond markets. Bank of Thailand is presumed to cut rates on Wednesday. The bank will reduce by a further 25 basis.

Alberto Fernandez’s government faced new counteroffers from its largest creditors intending to reach a restructuring agreement. Bondholders should sign a deal not later than Friday, the due date of $500 million delayed interest payments.  Argentina will result to a ninth default on the micro front if it fails to get an agreement or pay the amount by date.

Data and Happenings

Malaysia’s parliament is due to sit for a single day, which will be limited to the King’s speech.

The King will give a speech after Ahmad Zanid Hamidi’s statement. Ahmad Zanid Hamidi was the chairman of the ruling Barisan Nasional.  The ruling said that it would provide full support and confidence for Muhyiddin Yassin as the prime minister of Malaysia.

Easing the political risk in the country was blamed for dragging the Malaysia stocks into a bear market. Nevertheless, it may help to support the assets of the country. April CPI of Malaysia is due on Wednesday.

A Bloomberg survey reported that prices would fall by 1.8 percent.  Also, it is projected that inflation will fall below expectations in Asia, which will broadly support bond prices in May.

Thailand is expected to go deeper contraction after it releases the first-quarter GDP on Monday. The report came out as baht has overturned some of its earlier losses to be one of Asia’s leading currencies.

Taiwan’s export contract in April is due on Wednesday. These export contracts are expected to contract. South Korea’s 20-day exports for that are due on Thursday are predicted to have further decline. Korean exports are regarded as leading in global economic activity. The severe shortfall may bring an adverse impact on more significant markets.

Russia’s economic growth is predicted to slow from 2.1 to 1.8% year-on-year in the first quarter. The impact of plunging oil prices and the coronavirus pandemic will start to show.

A substantial data week from Poland will start to show the effect of the coronavirus pandemic. Mexico will begin to reopen its economy on Monday, starting from automobiles, construction companies, and mining.

The report said predicted that inflation would be subdued despite weak demand during the first two weeks of May.

Currently, investors in Mexico are net short on peso since the end of 2018.  The survey revealed that Chile’s GDP might increase from a year earlier during the first quarter, but economists warn that the increase will not lessen the concern about the 2020 prediction.

Peru will probably report a decline in GDP in the first quarter due to coronavirus outbreaks and lockdown measures on the economy.

Relevant news