Difficult Times for Turkey, Brazil and, to a Lesser Extent, Russia

• The scatter plot shows the changes in the 10Y yield (in bps) with the changes in the currency (in %, relative to the US Dollar) for most of the EM economies since the start of 2020.
• A significant rise in long-term bond yields would be represented by a upside move on the Y-axis, while a sharp depreciation of the currency would be represented by a shift to the left on the X-axis.
• We can notice that three countries are currently still economically fragile despite the important recovery in markets we have observed since the summer of 2020:
• Turkey 10Y bond yield is trading 551bps higher than in January 2020, while the TRY has depreciated by 27% against the USD, after Erdogan decided to fire both CBRT governor and deputy governor last month.
• In Brazil, the rise in political uncertainty has also led to a 28% depreciation in the BRL since the start of 2020, while the 10Y is up 262bps.
• Surprisingly, even though oil prices have risen sharply since April 2020, the RUB is still down 20% against the greenback, while the 10Y has increased by 92bps.
• This puts TRY, BRL and to a lesser extent RUB policymakers in a difficult position: on one side, financial conditions have tightened due to the significant increase in interest rates, but central banks officials cannot ease to much as the weak currency could increase the inflationary pressures in the coming months.

Source: Bloomberg/MNI