Rotation within the ‘good carry’ basket as INR and ZAR outshine RUB and BRL – Goldman Sachs

Kamakshya Trivedi, Research Analyst at Goldman Sachs, points out that there was a rotation within the ‘good carry’ basket as INR and ZAR has outshined the RUB and BRL.

Key Quotes

“In early February we argued that, after strong rallies the RUB and BRL were running into resistance and that it would be the turn of ZAR and especially INR to shine. Since then, as oil and copper prices have fallen back from their tight range and markets have digested a March Fed hike, the relatively more commodity-oriented currencies such as RUB and BRL (and especially CLP and COP) have underperformed, whereas INR and ZAR have clocked up 3% plus returns.”

“In the case of the INR, the landslide victory of the ruling BJP in India’s largest state of Uttar Pradesh is likely to further catalyse portfolio inflows into India’s asset markets, reversing the outflows seen in Q4 last year in the midst of the demonetisation. Our conversations with investors suggested that many viewed this election as an unofficial test of PM Modi’s personal popularity and his policy of demonetisation, and a loss would have significantly hampered the ability of the government to implement meaningful economic reform over the next couple of years. By contrast, this unexpectedly clear result should help with the parliamentary arithmetic in the future and provide a boost for reform momentum in the second half of PM Modi’s term.”

“From a macro standpoint, the combination of recovering growth and inflation moving higher – as evidenced by the recent pick-up in PMIs and the tick-up in the last headline inflation print – means pressure for FX appreciation is among the strongest in INR and even the RBI is likely to countenance some of that while leaning against it.”