News that the EU and the UK had agreed a 21-month Brexit transition deal propelled sterling higher yesterday but some gains were subsequently lost as doubts crept in. Sterling faces a difficult week between today's CPI, tomorrow's BoE meeting and the EU summit in Brussels on Thursday and Friday.
Article / 09 June 2016 at 10:35 GMT

Daily Shot: EM currencies and stocks rip higher Team / Saxo Bank
  • Brazil's real firms but inflation is stubbornly high
  • South African rand zips up 8% despite GDP contraction
  • Bank of Korea delivers surprise cut as problems loom
  • Poland’s zloty rallies with other EM currencies
  • Chinese back-door capital outflows continue

By Walter Kurtz*

We begin with emerging markets where currencies, bonds, and equities are moving higher.
1. The Brazilian real continues to strengthen.
Brazil's inflation remains stubbornly high (above consensus) despite weak domestic demand.

2. The South African rand is up some 8% over the past few days.

South Africa had its first year-over-year GDP contraction since 2009. Growth is expected to remain tepid.

3. South Korea unexpectedly cut the benchmark rate to record low. Korea's central bank is concerned about the deleveraging taking place in the corporate sector hurting economic growth.
4. Poland’s zloty rallies with other EM currencies in response to a "softer" mortgage conversion plan. Years back, many Polish households took out mortgages in Swiss francs and got burned when the franc rallied sharply against the zloty. The government was threatening to force the banks to allow these borrowers to repay at the original exchange rate - which would bring the banking sector to its knees. The latest conversion plan, however, seems far less draconian.

5. Mexican stock market is outperforming.
1. Turning to China, we see a massive spike in Chinese imports from Hong Kong as back-door capital outflows continue via "over-invoicing".

2. The USDCNH (offshore yuan) risk reversals show reduced bets on the renminbi devaluation against the dollar. This is in response to a softer US dollar.

3. Next, we have a couple of China demographics charts that will have significant implications over the next few decades.
Around the year 2022, India's population will overtake China's.

China's working age population has already started declining.

— Edited by Clare MacCarthy

* Walter Kurtz is an alias

** This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot here. E-mail addresses are never shared with anyone.

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