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China-exposed currencies, non-oil commodity producers to underperform – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Goldman Sachs, suggests that while the temporary rebound in oil prices has seen EM FX rebound as well, they continue to expect high volatility in the oil market until 2016H2.

    Key Quotes

    “This is based on the view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium. Specifically, our Commodities team argues for a range between $20/bbl and $40/bbl, while retaining their positive 12-month outlook of $54/bbl (Brent) from spot levels. These forecasts would suggest more volatility in the coming months for the oil exporters’ currencies, and stabilisation towards the end of the year. The RUB and MXN, where valuation levels are supportive, should be key beneficiaries, and our 12-month forecasts see potential for appreciation to 66 for $/RUB and 17.5 for $/MXN. The starting valuation level is arguably less supportive for the COP, as Colombia’s current account deficit remains excessive and our forecasts call for further depreciation to 3,600 in 12 months.

    In contrast, we expect metals to underperform oil during 2016H2 and 2017, on the back of lower demand growth from China. We have revised down our aluminium and copper prices to US$1,350/mt and US$4,000/mt respectively, which reflects around 10% and 15% downside (see Metal Detector: ‘Capex’-heavy metals slow to adjust, set to underperform oil 2H16/17, February 8, 2016).

    We continue to forecast further gradual depreciation in the CNY towards 7.00 in 12 months as a part of the policy easing mix, although it is likely to follow the stop-start pattern of the past year. A more abrupt depreciation is still a tail-risk in our view, but could become more probable should growth slow more sharply or the Dollar appreciate more than we forecast. In such tail-risk scenarios, the USD/CNY fair value could go as high as 8.3 according to our FEER model, although the more intense use of capital controls and/or further reserve depletion could alleviate the need for a sharp BoP adjustment alongside an abrupt currency depreciation.

    Given our broader view that China’s bumpy deceleration will extend, we forecast further depreciation in places exposed to China’s slowdown and currency shifts, and where the domestic economic environment also calls for further easing in financial conditions (MYR, THB, KRW); and we continue to think that USD/NJA upside should be an important constituent of EM FX portfolios. We remain relatively more constructive on currencies in the region which are supported by stronger domestic demand growth (INR, PHP).”
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