How falling oil prices are fast becoming a catalyst for emerging markets

Illustration by Ajay Mohanty
Falling oil prices are fast becoming a catalyst for emerging markets. Last week’s slide in crude was partly behind the weakness in the Russian ruble, Mexican peso and Malaysian ringgit, according to Societe Generale SA. With oil wallowing in a bear market, OPEC and its allies started laying the groundwork to cut oil supply in 2019 in a meeting in Abu Dhabi on Sunday.

“Oil-importing emerging economies’ currencies would likely react negatively to a cut in OPEC output given Iranian oil exports are already likely to wane over time under the impact of U.S. sanctions,” said Mansoor Mohi-uddin, the Singapore-based head of foreign-exchange strategy at NatWest Markets. “In contrast, if oil prices fall it will benefit the currencies of major oil-importing emerging markets including the Indian rupee and Turkish lira.”

The outlook for oil, a key source of revenue for Russia and Saudi Arabia, is adding a fresh twist for a market already obsessed with Federal Reserve tightening and the U.S.-China trade dispute. The prospect of any breakthrough on trade took a knock Friday when White House trade adviser Peter Navarro warned Wall Street not to pressure President Donald Trump into a quick deal.

On the domestic front, there’s a chance Mexico’s central bank will increase interest rates Thursday after the peso clocked up its sixth weekly loss. Policy makers in Thailand, Indonesia and the Philippines will likely leave their benchmark rates unchanged, thanks to gains in the rupiah and the peso, according to ING Groep NV.

The ruble led a retreat in emerging-market currencies last week after the Fed signaled it will keep raising rates, making Wednesday’s release of U.S. consumer-price data the next pointer for monetary policy.

Oil Matters

Oil futures climbed on Monday after a record run of losses as Saudi Arabia said it will reduce crude sales in December and speculation rose that OPEC and its allies will cut output next year. Futures tumbled into a bear market Thursday, and Brent crude dipped below $70 a barrel on Friday for the first time in more than six months, as fears of a production crunch and $100-a-barrel crude through the summer morphed into talk of a glut Adipec conference starts Monday in Abu Dhabi, with hundreds of oil executives and government officials attending, following OPEC/non-OPEC committee meetings over the weekend OPEC releases its monthly report Tuesday, the same day as IEA’s World Energy Outlook 2018. IEA follows up on Wednesday with its monthly Oil Market Report

Mexican Move

Banks including JPMorgan Chase & Co. expect policymakers to boost the key rate from a nine-year high of 7.75 percent

The peso, stocks and bonds have come under pressure since incoming President Andrews Manuel Lopez Obrador scrapped a partially built $13 billion airport and a lawmaker from his party unexpectedly proposed abolishing some bank commissions. Lopez Obrador later assured investors he won’t make changes to banking laws, sparking a rebound in Mexican assets

The peso’s “high carry and good value” will be anchors in the long run “as the incoming administration’s bumpy takeoff continues,” Goldman Sachs Group Inc. strategists including New York-based Zach Pandl wrote in a Nov. 9 report. “That carry is likely to move higher” with an increased likelihood of a rate hike.

Asia on Hold

Most economists expect policymakers in the Philippines, Indonesia and Thailand to hold rates this week.

The Philippine peso was Asia’s best performer in October and has extended those gains in November, while Indonesia’s currency has taken that crown so far for this month.

Bangko Sentral ng Pilipinas, which meets on Thursday, last raised the policy rate in September, taking the increase to 150 basis points in just over four months.

 
Inflation in the Philippines remains at an almost decade high.

Bank Indonesia has hiked 150 basis points since mid-May. It kept its benchmark rate unchanged at the October meeting. Foreign funds have been buying the nation’s assets in recent weeks.

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