Limited forex impact from Argentina
As Argentina falls into economic chaos, fears of default are well founded. The peso has fallen more the 45% against the USD this year and official inflation is over 25%. The central bank’s futile attempt to fix things hiked rates 15% to 60% and promised not to lower before December. We doubt this will affect investors’ confidence or slow exodus of capital. Real interest rates are well below levels that would attract capital inflow.
“Contagion” is the talk, but we suspect that likelihood is extremely low. Following Turkey’s currency, collapsing markets are hypersensitive to the next emerging market fail. Argentina is a special case. Unlike Turkey, which is part of the MSCI emerging market index and well entrenched in emerging portfolios, Argentina is categorized as a frontier investment. Very select investors venture into this segment, they understand the risks, and they will backstop contagion concerns. That gives us time to worry about TRY, BRL and ZAR as America’s tighter money continues to pressure weak EM currencies.
Strong yen, weak economy
Japan’s economic data this week remain subdued, with a continued slowdown in industrial production in July, consumer consumption flat and a slight acceleration in inflation for August (CPI annual figures at 1.20%, slightly above consensus at 1%; core at 0.90%), suggesting a weak bounce for Q3 GDP. Accordingly, the Bank of Japan is expected to scale down its inflation target of 2% while maintaining its key rate stable at -0.10% at its next policy meeting on 18 September. Currently trading at 110.70, USD/JPY is expected to decline further, approaching strong support at 110.07 (20 July low).
Mounting risk-off sentiment is prompting investors to stop taking new positions and take refuge in safe havens. Key political events are the IMF’s Argentina rescue, NAFTA talks along with Trump’s rejection of zero duties on cars put forward by the EU and Trump’s intent to impose an additional $200 billion tariffs in Chinese imports by next week. As uncertainty predominates, equities remain in the red, with the Hong Kong Hang Seng given at -1.15%, Euro Stoxx 50 at -0.52%, SMI at -0.45% and Nikkei 225 at -0.02%.