Brazil's Trade Balance deterioration is eerily similar to that of Indonesia (see note earlier today) with an annual surplus of just over $30 bln two years ago being eroded into a flat position over the last 12 months (see chart).

October saw a deficit of -$224 mln, compared to an expected surplus of $1.2 bln and a surplus of $1.65 bln in October 2011. This is the first October deficit since 2000 and it takes the trailing 12 month ma of the balance down to a mere $17 mln (just over $200 mln cumulative), its lowest position since late 2001. This suggests that the October Current Account deficit will continue to probe lower (the data will not be released until November 22nd) and act as a further drain on domestic liquidity conditions.

Although in Indonesia's case the cause for the deterioration has been a reduction in exports these have been relatively stable in Brazil, with the 12 month ma flat-lining at $20 bln in recent months and September's exports were $22.8 bln, an increase of 4.86% YoY. Imports grew to a new all time high of $23.04 bln an increase of 14.6% YoY. The 12 month ma remains in an increasing trend also reaching an all time high of $20.0 bln this month, up from $18.7 bln a year ago.

The ISM Manufacturing report for October, the first key data point for the month in which the Washington shutdown took place, shows no impact was felt by the manufacturing sector with the index rising to 56.4, its highest level since April 2011.

As we have explained before, the ISM is a diffusion index, which measures the change in conditions from one month to the next, means that you cannot strictly compare one reading to another across multiple quarters. In fact the current reading should respond to a greater degree of economic activity than the April 2011 reading given that it comes a further 30 months into the protracted recovery for the manufacturing sector.

Further encouragement comes from the fact that strength was well dispersed across sub-indexes. The New Order index rose slightly to 60.6, the 3rd consecutive month that this metric has been above 60 (again its best run since April 2011). We note that New Export Orders broke out to 57, the highest level since April 2012 and perhaps a sign of strengthening demand overseas as Europe recovers.

Production dipped slightly to 60.8 from 62.6 but has now remained above 60 for 4 straight months while Inventories grew modestly to 52.5, the first monthly re-build since June. Employment growth remained modest at 53.2 but in recent months this metric has been rather more positive than the dreary payroll statistics calculated by the BLS.

Of course much of this report had already been broadly anticipated by the strong rally in industrially focused equities in recent weeks, but this does not negate the encouraging message of this report which again underlines how far behind the curve US monetary policy has fallen.

After the trauma of their summer decline and subsequent partial recovery most EM carry currencies enjoyed a quiet start to the autumn. This period of calm looks to be drawing to a close with some significant break out in cross rates taking place over the last few sessions.

We note particularly weakness in the BRL (blue) and ZAR (green), the former of which had enjoyed the most impressive recovery in recent weeks, helped by a very large intervention in currency markets. Yesterday's news of a much wider than expected fiscal deficit seems to have undermined the rebuilt confidence and the BRL has fallen to 2.25, its weakest level since September 17th. The ZAR never enjoyed as strong a recovery but had at least been stable in recent months but this morning's sharp rise to 10.15 threatens to break the currency out of its recovery range and allow a full retest of the August high at 10.50.

Other important break-outs include the TRY (red), which broke through important resistance at the 2.00 level and coincident 50 day ma this morning to reach 2.017. The next key level is 2.05 and then the all time high of 2.08 recorded in early September. Indonesia's IDR (black line) tends to move in a staircase fashion (a sign of its illiquidity and heavy manipulation by the central bank) but again at 11335 looks to be moving up to test key resistance around the 11500 level. India's INR (orange) has recently been the most stable currency, a reflection of the fact that its equity market remains strongly in favor by international investors and also that its currency already adjusted by a greater degree than the others we track. However, should the weakness in other carry currencies continue to be felt we doubt that the INR will remain immune to the overall trend.

We continue to view the deterioration of a number of EM countries's trade positions and current accounts (which are of course closely linked) as one of the major factors behind their significant under-performance in recent quarters. Indonesia continued the string of poor data this morning with its September Trade Balance. This showed a deficit of -$657 mln, compared to an expected small surplus of $96 mln, which the August deficit was revised lower from -$72 to -$132. This takes the rolling 12 month ma down to -$745 mln, a new record for data that starts in 2008. We note that it is a slippage in exports which have been behind the widening deficit. These dropped by -6.8% YoY in September to $14.8 bln, taking the trailing 12 month ma down to $15.1 bln, compared to the March 2012 peak for this metric at $17.2 bln (see chart).

Although the current deficit clearly remains affordable, the size of the swing from the position enjoyed two years ago is really what matters. In the 12 months ending September 2011 the Trade Balance averaged a surplus of over $2.5 bln, or $30 bln over the entire 12 month period, compared to a deficit of -$9 bln over the prior 12 months. A swing of -$39 bln in annual trade is certainly significant for Indonesia and is one of the factors as to why the country's reserves stopped their relentless rise prior to the large currency interventions which took them lower this summer (see chart).