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Emerging Markets

Quarterly Currency Outlook

MarketQuants Research

Quarterly - 2019 Q1

TAC ECONOMICS www.taceconomics.com

Completed on January 14, 2019

Quarterly Currency Outlook – EM MarketQuant Research 2019 Q1

TAC ECONOMICS www.taceconomics.com 3

Content

1. Key background elements for EM currencies .............................................................................................. 4

2. Detailed Currency Outlook ............................................................................................................................. 5

Summary tables .......................................................................................................... 5

Brazilian Real - BRL ...................................................................................................... 6

Chinese Yuan - CNY ...................................................................................................... 7

Indian Rupee - INR ....................................................................................................... 8

Indonesian Rupiah - IDR ................................................................................................ 9

Korean Won - KRW ..................................................................................................... 10

Mexican Peso - MXN ................................................................................................... 11

Polish Zloty - PLN ....................................................................................................... 12

Russian Ruble - RUB ................................................................................................... 13

South African Rand - ZAR ............................................................................................. 14

Turkish Lira - TRY ....................................................................................................... 15

3. Methodology .................................................................................................................................................. 16



1. Key background elements for EM currencies

Our Quarterly Currency Outlook is driven by the

following global scenario on Emerging Markets and

Developing Economies:

- Economic deceleration is materializing for EM

with headwinds from external factors (tightening

in global USD liquidity, USD appreciation, trade

tensions) and declining support from domestic

factors (monetary tightening, cyclical downturn

in investment and confidence, policy

uncertainties).

- The broad cyclical downturn is expected to get

worse post mid-2019 when the simultaneous

slowdown in China and reversal in the US

dampen world economic and financial dynamics.

- However, exchange rate and policy adjustments

initiated in 2018 in many among the large EM

have created both resilience capabilities and

policy space. Our quantitative tools also support

the view that the 10 Key EM1 would be able to

better weather the cyclical storm, with more

resilient currencies and the ability to stimulate

domestic demand as a reaction to external

headwinds. In these large EM however,

vulnerabilities remain high for corporate and

bank borrowers.

- Mid-size countries and those substantially

exposed to commodity prices would concentrate

most of the larger risks, including pressures on

currency rates, fiscal difficulties and down-

pressures on activity.

- The major risks to our central scenario are

related to political and economic policies

potentially detrimental to businesses and

households’ confidence and investments. In

particular, increasing difficulties for Chinese

authorities to manage further the cyclical

slowdown could rapidly trigger “disorderly”

adjustments to banks and financial markets, as

well as to the corporate sector. In addition,

present pick up in global strategic tensions (trade

protectionism, Brexit, elections) could lead to

significant economic depression in EM.

EUR/USD Markov Switching model

Financial logic (bond yield differential) likely to prevail

Source: TAC ECONOMICS

EUR/USD Projections

Source: TAC ECONOMICS

1 China, India, Indonesia, South Korea, Brazil, Mexico,

Turkey, Russia, Poland, South Africa

Exhibit 1 - EUR/USD projections

Expected large oscillations, towards 1.15 in 2020H1

Exhibit 2 - EUR/USD Markov Switching model

Financial logic (bond yield differential) likely to prevail



2. Detailed Currency Outlook

Summary tables

Exchange Rate Forecasts for June 2020

(month average against Euro)

Spot rate

Jan. 8, 2018

Mixture model

mode 75% confidence interval

Brazilian Real (BRL) 4.26 4.73 3.9 – 5.8

Chinese Yuan (CNY) 7.84 8.36 7.8 – 9.0

Indian Rupee (INR) 80.2 80.6 76.7 – 84.2

Indonesian Rupiah (IDR) 16,182 17,557 14,853 – 20,424

Korean Won (KRW) 1,289 1,296 1,070 – 1,539

Mexican Peso (MXN) 22.2 25.5 24.0 - 26.9

Polish Zloty (PLN) 4.31 4.37 4.2 - 4.6

Russian Ruble (RUB) 76.7 94.0 80.5 – 108.4

South African Rand (ZAR) 16.0 17.7 16.4 – 19.0

Turkish Lira (TRY) 6.29 6.02 5.6 – 6.4

Cross-Rates Forecasts for June 2020

(month average)

BRL CNY INR IDR KRW MXN PLN RUB ZAR TRY

USD 4.06 7.19 69.3 15,110 1,116 21.9 3.75 80.9 15.2 5.18

EUR 4.73 8.36 80.6 17,557 1,296 25.5 4.37 94.0 17.7 6.02

BRL 1.77 17.0 3,710 273.9 5.39 0.92 19.9 3.74 1.27

CNY 0.57 9.6 2,101 155.1 3.05 0.52 11.24 2.12 0.72

INR 0.06 0.10 217.9 16.1 0.32 0.05 1.17 0.22 0.07

IDR 0.00 0.00 0.00 0.07 0.00 0.00 0.01 0.00 0.00

KRW 0.00 0.01 0.06 13.5 0.02 0.00 0.07 0.01 0.00

MXN 0.19 0.33 3.16 688.3 50.8 0.17 3.68 0.69 0.24

PLN 1.08 1.91 18.4 4,014 296.4 5.83 21.5 4.04 1.38

RUB 0.05 0.09 0.86 186.9 13.8 0.27 0.05 0.19 0.06

ZAR 0.27 0.47 4.56 993.2 73.3 1.44 0.25 5.32 0.34

TRY 0.79 1.39 13.4 2,916 215.3 4.24 0.73 15.6 2.94



Brazilian Real - BRL

The combination of (1) persistence of a WatchList

Indication pointing to prolonged high vulnerability

for the exchange rate up to 2021Q2, (2) potential

international financial turbulences and (3)

expected upward pressures on prices in the near-

term suggest that volatility will remain high during

2019 and a further depreciation up to USD/BRL 4.0-

4.2 is likely starting from 2019H2.

Econometric Projections

Brazilian capital markets were under heavy political

influence over the past months, with substantial capital

inflows before President J. Bolsonaro’s election. With

stable domestic interest rates and increasing global risk

aversion, the USD/BRL depreciated again to 3.91 in mid-

Dec. 2018. Since Bolsonaro has taken offices on Jan. 1,

2019, the Brazilian Real has resumed its reappreciation

to USD/BRL 3.71 on Jan. 8, 2019.

Selic rate has remained stable so far but our policy

reaction function and the likely increase in inflation

during 2019 suggest a tightening process around mid-

2019, with a magnitude directly related to the potential

international financial turbulences.

RiskMonitor Analysis

Brazil’s average Economic & Financial Risk rating has

registered a visible improvement in 2018Q3, to 48.3

from 49.8 in Q2 and continuing a movement initiated in

2016. This decline in Risk rating mostly reflects a large

improvement in the Growth Balance (positive reversal

of the current account for two years).

A detailed examination of our range of risk metrics

supports a much more cautious view for later horizons.

Indeed, the recent reduction in short-term horizon’s

Risk rating (46.1 for the less than 1-year horizon) has

expanded the gap with longer-term Risk rating, which

stays at an elevated level (52.5 for 3 to 5 years).

Uncertainties are reinforced by the persistence of a

WatchList Indication pointing to prolonged high

vulnerability for the exchange rate up to 2021Q2.

Consensus Projections

end-of-period value against Euro*

Mean Divergence Max Min

Jan. 2019 4.29 6% 4.4 4.1

Mar. 2019 4.28 11% 4.5 4.1

Dec. 2019 4.46 16% 4.9 4.2

June 2020 4.55

Source: Consensus Inc.

*The divergence index does not include the divergence on

EUR/USD.

TAC ECONOMICS Projections

(Mixed econometric and RiskMonitor approach)

Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/BRL 4.26 4.58 5.05 4.73



Chinese Yuan - CNY The country remains affected by a WatchList

Indication suggesting a high vulnerability to sudden

shocks on the currency. Our central scenario is a

significant but controlled economic slowdown and

a further 5%-10% depreciation of the CNY against

the USD.


GDP growth has slowed in 2018Q3 (+6.5% y/y), with

lower growth for investment spending and moderating

consumer spending. In 2018Q4, retail-sale dynamics

have been negatively affected by the decline in car

sales, amplified by the end of fiscal subsidies. Monetary

policy transmission is constrained by declining

confidence and expectations, and persistent liquidity

injections have not prevented a modest pick-up in

interbank rates. This in turn has supported the CNY

exchange rate, in parallel with markets’ over-reactions

to US-China dialogue.

Our central scenario for China outlook is one of

significant but controlled economic slowdown and a

further 5%-10% depreciation of the CNY against the

USD, but a vicious circle of more rapid economic

deceleration despite supportive policies and increasing

worries on the financial sector could create conditions

for a more disorderly process.


The average Economic & Financial Risk Rating of China

remained stable at an “intermediate” level around 43-C.

The overall stabilization is associated with higher risks

on activity, then exchange rate and a much lower

reading for payment. The metrics support a scenario of

an increase in risk materialization during 2019. This is

consistent with our expectations of simultaneous

deterioration in our Fundamental Balances for Growth

(rapidly declining current account surplus, slowing GDP

growth) and Liquidity (declining Fx reserves). The

country remains affected by a Watch List Indication

suggesting a high vulnerability to sudden shocks, on the

currency but also indirectly on economic activity.




Jan. 2019 7.9 3% 8.0 7.8

Mar. 2019 8.0 5% 8.2 7.8

Dec. 2019 8.3 11% 8.8 7.8

June 2020 8.4



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/CNY 7.84 7.82 8.86 8.36



Indian Rupee - INR

Despite the currency overvaluation, low inflation

and good economic performance should support

the Rupee in the medium-term.

Models suggest the Indian Rupee to stabilize just

above USD/INR 70.0 (EUR/INR 80 in 2020Q2).


The Indian Rupee has been highly volatile since its

historical low (74.4 against USD on Oct. 9),

reappreciating by +6.5% in Oct.-Nov. thanks to

contraction in oil prices, then depreciating (-3% to

USD/INR 72 on Dec. 18) due to renewed global and

domestic policies uncertainties.

Inflation has corrected sharply in the last few months

(+2.3% y/y in Nov.); indeed, food prices are receding on

the back of improving physical and digital agricultural

markets infrastructures. After hiking twice its key policy

rate (+25bp each in June and Aug. 2018 to 6.50%), the

RBI has paused its monetary tightening thanks to

reduced inflationary pressures. Yet, in spite of potential

bouts of currency depreciation and rapid pass-through

on domestic prices (mostly fuel), S. Das, the new RBI

Governor, could initiate a more accommodative stance

in the coming quarters.


The Economic & Financial Risk rating has stabilized at a

favorable level (37.3-B in 2018Q3) owing to very low

level of risk on structural (Growth and Debt) and

Liquidity Balances. Overall, risks are concentrated on

the short-term horizon with potential bouts of steep

currency volatility and ongoing slowdown in the

momentum of domestic demand.

On the Foreign Exchange Balance, the plunge in forex

reserves quality after 2018Q1 indicates that the

reversal in forex reserves comes from substantial cross-

border capital flows. The Indian Rupee is modestly

overvalued despite the large currency depreciation in

2018 (-16% against USD between Jan. and Oct.). With

the recent re-appreciation, potential currency

adjustment is increasingly likely in the short-term.




Jan. 2019 82.1 10% 87.0 78.9

Mar. 2019 83.3 12% 88.1 78.4

Dec. 2019 86.2 17% 94.0 79.5

June 2020 86.4



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/INR 80.2 75.7 82.4 80.6



Indonesian Rupiah - IDR

The Indonesian economy is currently well oriented

with strong domestic demand and low inflationary

pressure. However, after a relative stable period in

2019H1, the Indonesian Rupiah could start

depreciating due to lower oil price.

Our models suggest the USD/IDR close to 15,100 in

2020H1 (EUR/IDR 17,500).


The depreciating trend of the Rupiah has ceased until

Oct. 2018 (up to USD/IDR 15,290); then policy efforts by

the Central Bank BI (adequate liquidity, tightening

stance) have led to a rapid reappreciation in November

(-6.6% to about USD/IDR 14,500 in mid-Dec.). Further

currency volatility is very likely because of ongoing

global trade and financial tensions.

The BI has hiked its key policy rate (+25bp to 6.0%), third

consecutive hike, because of weakening currency and

deteriorating current account. The BI will continue to be

vigilant about forex stability, without necessarily

tightening further its monetary stance in the first

quarters of 2019.

However, our scenario for oil prices suggests Brent

prices hovering around 50$/bl at the end of 2019 and

early 2020. It should weigh on the Rupiah starting in the

second half of 2019.


The Economic & Financial Risk ratings has steadily

improved since 2017, reaching the low risk category

(39.7-B in 2018Q3) due to strong domestic demand with

managed inflationary pressures.

On the Foreign Exchange Balance, further move into

the unsustainable overvaluation quadrant is due to

significant outflows of volatile short-term capital, while

the gradual depreciation of the Indonesian Rupiah until

October 2018 has not been sufficient to reduce the mild

currency overvaluation, as competing currencies,

notably in Asia, have also weakened in parallel.




Jan. 2019 16,652 9% 17,518 16,002

Mar. 2019 16,867 13% 17,981 15,801

Dec. 2019 17,509 16% 18,981 16,248

June 2020 17,529



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/IDR 16,182 15,962 18,485 17,557



Korean Won - KRW

The dynamics of the CNY and expected slowdown in

activity could weigh on the KRW in 2019H2. Overall,

the models suggest an erratic path against the EUR

up to early 2020 to EUR/KRW 1,300 in 2020Q2.


The Korean Won has oscillated around USD/KRW 1125

due to ongoing trade tensions between China and US.

Short-term fluctuations are likely to persist, and a

weaker Won should strengthen the competitive

advantage of the already strong export sector. Bank of

Korea (BoK) has unexpectedly raised its policy rate on

Nov. 30, 2018 (+25bps to +1.75%) to curb escalating

domestic debt, especially in the housing market, and

adjust to the impact of monetary policy normalization

in advanced economies.

GDP growth has reduced in 2018Q3 (+2.0% y/y from

+2.8% in Q2) to its lowest level in the past nine years.

Going forward, increase in minimum wages (+16% in

2018 and +11% in 2019) and in government spending

should support domestic demand.


The Economic & Financial Risk rating has suddenly

spiked in 2018Q3 (to 41.9-C), this degradation is

corroborated by a new Watch List Indication on

Economic Activity, which highlights a vulnerability to a

significant shock on the business cycle for the period

2018Q3-2020Q2. Indeed, downturn in our leading

indicator of economic activity, coupled with trade

tensions between China-U.S. and expected recession in

Japan (end-2019), portends a risk of sharp reduction in

economic growth (from mid-2019) which would

translate into strong pressures on the Korean Won and

on the banking sector (because of high domestic debt).

On the Foreign Exchange Balance, while the Korean

Won continues to be neutrally valued, the forex

reserves quality remains insufficient due to sizeable

short-term speculative and banking flows, this

combination entails substantial currency volatility, as

registered since July 2018.




Jan. 2019 1,289 4% 1,311 1,257

Mar. 2019 1,298 8% 1,351 1,248

Dec. 2019 1,352 17% 1,494 1,265

June 2020 1,364



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/KRW 1,289 1,191 1,372 1,296



Mexican Peso - MXN

Mexican Peso enjoys a very favorable exchange rate

competitiveness. However poor foreign exchange

reserves portend currency volatility and the cyclical

reversal in the US suggest further depreciation to

USD/MXN 22.0 in 2020.


Following a modest appreciation of the Mexican Peso in

Sept. 2018, the currency has depreciated (+7.0% against

USD to around USD/MXN 20-20.5) given the

uncertainties in domestic economic reforms, rapid

fluctuations in oil prices and tensions on financial

markets. Inflationary pressures have mildly decelerated

(+4.7% y/y in Nov. 2018) due to decrease in energy, food

and beverage prices. However, inflation is expected to

remain above the official target (+3.0%) given the pass-

through effects of weak exchange rate. After pausing its

tightening cycle since July 2018, the Central Bank has

hiked its overnight interbank rate again (+25bp to +8.0%

in Nov. 2018), given the consolidation in inflationary

pressures (especially persistently strong core inflation).

The revision of projections compare to the latest

publication in Oct. 2018 is very limited. The Mexican

Peso should progressively depreciate to USD/MXN 22.0

in early-2020, i.e. above EUR/MXN 25.0.


The Economic & Financial Risk rating has continued to

edge upwards in 2018Q3 (to 34.9-B), predominantly

due to the ongoing degradation in the Foreign

Exchange Balance. In addition, Mexico continues to face

uncertainties on USMCA ratification (ex-NAFTA),

domestic policy stance of the new government along

with volatility in global oil prices, all likely to keep risks

at its current level if not higher. On the Foreign

Exchange Balance, although the weak Mexican Peso

enjoys a very favorable exchange rate competitiveness;

the forex reserves quality is poor given the sizeable

short-term capital (in & out) flows, hence portending

further currency volatility as already evidenced in 2018.




Jan. 2019 23.2 7% 24.1 22.4

Mar. 2019 23.0 10% 24.3 22.0

Dec. 2019 24.1 14% 25.9 22.4

June 2020 24.4



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/MXN 22.2 23.4 26.8 25.5



Polish Zloty - PLN

The PLN remains highly vulnerable to speculative

capital flows as illustrated by the volatility in forex

reserves accumulation in recent quarters.

Poland’s sensitivity to international financial

turbulences should lead to bouts of volatility on the

currency, even though the PLN should remain in a

large range EUR/PLN 4.3-4.4 until mid-2020.


After registering an appreciating trend over 2017Q1-

2018Q1 (-6% against EUR), the Polish Zloty has

depreciated towards EUR/PLN 4.3 in 2018Q3.

Notwithstanding significant sensitivity to international

financial turbulences, leading to potential bouts of

volatility, the currency should remain in a large range

EUR/PLN 4.3-4.4 until the beginning of 2020. The

Central Bank (NBP) continues to keep its interest rate

unchanged (+1.5% since March 2015). The expected

temporary slowdown in economic growth and

manageable inflation with declining oil prices suggest

that the NBP should keep its interest rate unchanged

over the coming months.


The Economic & Financial Risk rating has declined in

2018Q3, at an average level (46.0-C), with most

Fundamental Balances at moderate risks level; thanks

to robust economic performances, Poland has

improved its position on the Growth, Cyclical and

Banking System Balances.

The trajectory of Poland has slightly deteriorated on

both Liquidity and Foreign Exchange Balances; the

small improvement in exchange rate competitiveness

(with the currency continuing depreciating against USD

close to 3.8 in Dec. 2018) but volatile forex reserves

accumulation in recent quarters (USD 108bn in 2018Q3,

covering 5 months of imports) is reflected through poor

forex reserves quality. Therefore, the currency remains

highly vulnerable to speculative capital flows.


end-of-period value against Euro


Jan. 2019 4.28 2.8% 4.32 4.20

Mar. 2019 4.28 3.5% 4.35 4.20

Dec. 2019 4.26 9.4% 4.50 4.10

June 2020 4.22




Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/PLN 4.31 4.40 4.33 4.37



Russian Ruble - RUB

Despite a restored competitiveness of the currency

after the 2018 adjustment (about -20% against

USD), the sensitivity to oil prices with Brent moving

back to 50$/bl in 2019 will put unavoidable

downward pressure on the Ruble.


After the Russian Ruble’s steep fall (-21% against USD

between April and September 2018), the currency has

hovered around USD/RUB 66.0 until early 2019.

Central Bank of Russia has raised its key rate in Dec.

2018 (+25bps to 7.75%), a second increase this year,

given growing inflationary pressures, volatile external

conditions and planned VAT hike.

Our scenario for oil prices suggests Brent prices

hovering around 50$/bl at the end of 2019 and early

2020. It will weigh on the Ruble until 2020 in a context

of global financial tensions


After five quarters of rapid increase, the Economic &

Financial Risk rating has improved in 2018Q3 (42.5-C)

thanks to a more favorable exchange rate

competitiveness. Meanwhile persisting geopolitical

tensions (Ukraine-Russia crisis and international

financial sanctions) and pressures on global oil prices

are likely to maintain risk levels. Also, overall Risk

ratings has been mildly revised upward because of

higher principal repayments for 2017 (USD 100bn

against earlier figures of 69bn).

On the Foreign Exchange Balance, the Russian Ruble

has regained competitiveness in 2018Q3 (due to a +15%

depreciation against USD between Q1 and Q3) moving

further into a neutral valuation range. Yet, the currency

should continue to face further adjustment given the

geo-political tensions and ongoing US monetary

tightening.




Jan. 2019 76.6 7% 80.4 75.0

Mar. 2019 76.4 18% 83.6 69.8

Dec. 2019 78.2 12% 83.0 73.5

June 2020 79.69



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/RUB 76.7 74.0 93.9 94.0



South African Rand - ZAR

The combination of limited economic growth,

current account deficit, decline in foreign exchange

reserves, decrease in commodity prices and

persistent sensitivity to international turbulences

points to the depreciation of the Rand towards

USD/ZAR 15.3 or EUR/ZAR 17.7 in 2020Q2.


After the past depreciation, the USDZAR oscillated

around 14.3 in 2018Q4. The Central Bank raised its

policy rate by +25bp to 6.75% in November. Further rate

hikes are likely in 2019 given the macro-prudential risks.

After two quarterly negative prints (“technical

recession”), the GDP growth expanded by +0.6% y/y in

2018Q3, supported by consumption and exports.

Inflation increased slightly to +5.2% in November 2018.

Combined with our adjusted Brent price projections,

inflation is unlikely to breach the official target range

(3%-6%).

The Rand is likely to remain volatile due to the

combination of limited economic growth, expanding

current account deficit, nascent decline in foreign

exchange reserves, probable decrease in commodity

prices and persistent sensitivity to global investor

sentiments towards emerging markets.


The Economic & Financial Risk rating has gradually

decline, to 45.4-C in 2018Q3, consistent with the past

rating trends, i.e. upward trend but short-term

adjustment. It reflects the slight improvement in the

short-term balances but still inherent structural

weaknesses that would take time to address (unlikely

before the May 2019 national elections).

The past South African Rand depreciation

(concentrated in 2018Q2) improved the exchange rate

competitiveness toward a slight undervaluation

indication. Therefore, the forex reserves quality has

remained insufficient owing to significant speculative

capital flows, which portends further currency volatility.




Jan. 2019 16.1 12% 17.3 15.4

Mar. 2019 16.4 17% 17.7 14.9

Dec. 2019 16.6 32% 20.2 14.8

June 2020 16.8



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/ZAR 16.0 15.5 18.4 17.7



Turkish Lira - TRY

Our Watch List Indication suggests an economic

recession in 2019, therefore we maintain a

substantial TRY risk premium.

However, reduced pressures on inflation and high

interest rates should support the Turkish Lira close

to EUR/TRY 6.0 in 2019 and 2020H1.


TRY has re-appreciated in 2018H2 given reduced

concerns over global EM assets and lower oil prices.

The CBRT (Central Bank of Republic of Turkey) has kept

its policy rate (one-week repo auction rate) unchanged

at 24% in December 2018. Policy rate cuts cannot be

ruled out ahead of local elections in March 2019.

However, the reduced pressures on inflation dynamics

are still insufficient to expect change in monetary

policy. Earlier than-expected easing may create

renewed pressures on the USD/TRY, thus making the

CBRT extremely cautious over its decisions.

High interest rates should support the Turkish Lira in

the medium term, despite a sharp slowdown in

economic activity in 2019.


The aggregate Economic & Financial Risk rating slightly

deteriorated in 2018Q3 to 51.8–C. It is consistent with

the current rebalancing of the economy with gradual

improvement in external imbalances and less currency

concerns, thereby the aggressive tightening of the

Central Bank (CBRT) translated into activity contraction

(unavoidable recession in the near term).

The improvement in the Foreign Exchange Balance

conceals a higher liquidity risk. Despite the Turkish Lira

appreciation in 2018H2 (+16.5% against USD since Sept.

2018), the past depreciation has improved the

exchange rate competitiveness toward undervaluation,

but it also negatively impacts the forex reserves quality

(massive capital outflows owing to risk aversion).




Jan. 2019 6.3 16% 7.1 6.0

Mar. 2019 6.6 17% 7.3 6.2

Dec. 2019 7.4 31% 8.3 6.0

June 2020 7.4



EUR/USD.



Spot

Jan. 8

June

2019

Dec.

2019

June

2020

EUR/TRY 6.29 5.67 6.62 6.02



3. Methodology

This document and the analysis on currency

projections are based on the combination of two

different sets of quantitative tools, associated with

in-depth qualitative review and process of

“challenging the models”.

A first set of quantitative tools uses traditional

econometric equations relating nominal exchange

rates (against the USD or EUR depending on the

monetary / fx regime adopted by local authorities or

de facto) with underlying macroeconomic variables

usually considered as having a large impact on EM

currencies: this includes notably growth differential

(with mature economies) and outlook, inflation and

interest rates (including levels, changes and gaps

with US), sensitivity to overall risk appetite / aversion,

and commodity or oil prices. Estimations are

calibrated on a long period (at least early 2000s) in

order to capture as best as possible trends and

underlying forces. The robust estimate is afterwards

associated with Monte Carlo simulations based on

observed ranges for explanatory variables and

incorporating covariances across variables.

The second set of quantitative measures is based on

outputs from TAC ECONOMICS’ proprietary tool for

country-risk assessment RiskMonitor. This tool is

based on non-linear relations between economic

variables and degree of specific imbalances, and

between such imbalances and degree and nature of

risk, and is based on datamining techniques that do

not require scenario construction on explanatory

variable. RiskMonitor outputs including an Exchange

Rate Risk Rating, the level of which is associated with

a non-gaussian distribution of probability for the

exchange rate. RiskMonitor also provides Early

Warning Signals for unexpected / systemic shocks,

including on the currency value.

The econometric equations and RiskMonitor outputs

are providing two different sets of probability

distribution at the 18-month ahead horizon. The

overall quantitative result and currency projection is

based on a mixed model combining the two sets of

probabilities with equal weighting.

Finally, the quantitative results are commented, and

sometime nuanced, by the more qualitative / policy

driven analysis on currency development and

outlook.

Disclaimer

These assessments are, as always, subject to the disclaimer provided below.

This material is published by TAC ECONOMICS SAS for information purposes only and should not be regarded as

providing any specific advice. Recipients should make their own independent evaluation of this information and

no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our

consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this

information is believed to be reliable, it has not been independently verified by TAC ECONOMICS and

TAC ECONOMICS makes no representation or warranty (express or implied) of any kind, as regards the accuracy

or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising

in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views,

forecasts, or estimates are solely those of TAC ECONOMICS, as of this date and are subject to change without

notice.



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Emerging Markets - TAC ECONOMICS · RiskMonitor Analysis Brazil’s average Economic & Financial...

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