BRL: the Brazilian real stands out for its relative weakness. Weighing on the currency, besides the ongoing political dysfunction we have noted in previous weeks, are ugly price developments for a number of Brazil’s major exports, including coffee and sugar, both of which are currently trading near 10-year lows. Iron ore prices are also weak and Brazil is particularly vulnerable in any trade war scenario that weakens China’s economy as China is far and away its largest export destination (around 19% of exports in 2016). The one positive note would be that China’s tariffs on US soybeans could boost prices for Brazil’s soybeans – exports of which were more than 10% of Brazil’s total exports in 2016.
MXN: topping the EM performance charts this week has been the peso, as the market has decided that incoming president Obrador is no immediate threat to the currency and the young administration has sent market friendly signals, like promising not to roll back prior reforms allowing foreign investment in Mexico’s energy sector. Still, policy moves from Obrador will bear close watching for MXN traders as his coalition controls both houses of Mexico’s Congress and once all votes have been tallied (not yet there as of this writing), could see Obrador controlling a two-thirds majority that allows for constitutional reforms. This is a powerful presidency – ad hoc policy headlines risk making a large impact – with the risk skewed a bit more negative rather than positive at the moment, given the peso’s solid recent bounce off of lows.
CLP: the Chilean peso has been weighed down by the ugly decline in copper prices, which have slipped far below the pivotal three dollars/lb. level, trading near $2.80 as of this writing. Given that copper is far and away Chile’s most important export, this presents further danger of a decline in the peso’s fortunes. And, as we have noted that Chile’s external debt position has worsened materially in recent years, the credit spreads versus DM debt look complacently tight. Stay tuned – still lower copper prices could drive further CLP declines.
Chart: Global Risk Index – risk conditions worsen further
Our broad Global Risk indicator eased away from its worst levels, as the recent worsening of the broad EM credit spreads has yielded to a more sideways tendency, our corporate credit measures were mixed, and volatility measures pulled back lower after a recent modest bounce. The market is likely very happy to see China’s intervention after a rather scary sharp weakening in the renminbi. Still, we’re reluctant to believe that the market is set to launch into a major risk-on move from here. Friday of this week, July 6, marked the beginning of the actual trade showdown between the US and China with the first $34 billion in mutual tariffs. And US President Trump is out on the campaign trail and finding receptive crowds as he continues to rail against China on trade. On his way to a recent campaign event in Montana, according to CBS news, Trump said on the subject of tariffs that “We have $34 billion tonight, then another $16 billion in two weeks,” “And then as you know we have $200 billion in abeyance, and then after that $200 billion, we have $300 billion in abeyance.” As if that wasn’t enough, he added “It’s only China,”.