BRICs

The central bank (PBoC) cut reserve requirements by 50 bp last weekend, thus continuing to ease monetary policy. However, the pace remains slow, and we do not think the PBoC is done yet.

The Brazilian real got hit hardest among the commodity and EM FX so far this year, with USDBRL reaching the 2.00. I expect CB support above and see BRL regain vs other EM FX near term…

Chinese inflation slowed in April in line with expectations. This leaves room for fruther reserve requirement cuts.

The Reserve Bank of India announced new restrictions on the FX markets in order to stop the INR from weakening further. This will, however, only offer temporary relief.

The Chinese trade surplus surprised on the upside, while the weak import figures raise worries regarding domestic demand. We expect growth to remain slow in Q2.

The CNY has in recent days taken advantage of its broadened band, as the fixing has been pushed clearly higher. We still expect a gradually stronger CNY towards the end of the year.

Both manufacturing sector PMIs – the HSBC/Markit index and the NBS’s official PMI – rose in April. The indices remain, however, at very divergent levels, increasing the uncertainty of the Chinese economic outlook.

Pressure on the INR is to remain until the domestic problems are resolved, but longer term strengthening is still intact. Thus we have revised up especially the short end of our INR forecast.

Following the good start of the year, EM currencies did not hold on to the gains. Yet the orderly gradual EM FX decline has not produced much volatility creating the impression of a bomb waiting to explode if only another “black swan” event strikes.

The reserve bank of India today cut its repo rate by 50bp from 8.50% to 8.00%, which was more than the 25bp expected. The rate cut is a welcome boost to the struggling Indian economy.