Emerging Market Currencies Hammered, Government Intervention Ahead
$MS, $GS
The biggest decline in emerging-market currencies since the global financial crisis is quickly turning from a welcome event for countries seeking to make their economies more competitive into something destructive.
The selloff has become so swift and so deep that officials are abandoning hands-off policies on concern the drop will fuel inflation, deter investment from foreigners and act as a drag on their economies at a time when global growth is already decelerating. To counter the declines, policy makers from Mexico to South Africa and Turkey have either stepped up intervention, increased interest rates or signaled an end to monetary easing.
Wall Street firms aren’t optimistic. Morgan Stanley (NYSE:MS) says more policy makers will be forced to act, and Goldman Sachs (NYSE:GS). warns there’s no end in sight to the weakness in developing-nation currencies.
The damage report, as follows:
Twenty of the 24 most-widely-traded emerging-market currencies tracked have weakened over the past month. An index of their exchange rates has dropped 8% this year to the lowest on record in data going back to Y 1993. The current pace of declines would make this the worst year since Y 2008.
Russia’s Ruble, the Colombian and Chilean Pesos and Brazil’s Real have led the losses since mid-May, with each falling more than 10%. The Hong Kong Dollar, pegged to the USD suffered the least, dropping just 0.02%.
The declines extended Friday, when the Ruble fell 3% as of 3:28p EDT in New York after an interest-rate cut. Russia already suspended USD purchases to build reserves following a rout in the currency that almost wiped out its advance this year.
The Thai Baht fell to a 6-year low Friday, while South Africa’s Rand reached the weakest level in more than 10 yrs.
The reasons:
Interest rates in the US are on the rise, drawing investors from around the world. At the same time, the prices of commodities that have fueled many emerging-market economies in recent years are back on the decline.
US Fed Chairwoman Janet Yellen has said she expects to raise USinterest rates this year as the labor market strengthens, with some economists forecasting a move in September, others in December and others in Y 2016 if ever.
Higher yields in the US would make riskier assets in emerging markets less attractive, just as commodity-supply gluts and slower growth in China crimp demand for raw-material exports.
With nations such as Indonesia and Colombia seeing near-record deficits in their current-accounts; the broadest measure of trade since it includes investment, the drop in currencies is a “necessary adjustment to address imbalances. Expect the currency rout will continue as governments struggle to adapt to a worsening global environment.
With a near-record $7.5-T in foreign reserves, developing nations have tools to keep the currency declines from becoming disorderly. And as long as exchange rates remain flexible, emerging markets will avoid any serious crisis.
That is a long-term fundamental change in emerging markets that should make investors more comfortable about what’s going on, regardless of what happens.
Mexico’s central bank expanded its currency intervention program last Thursday, 4X’ing daily USD sales to $200-M. Separately, it reduced the minimum price decline needed to trigger an extraordinary Dollar sale, also for $200 million, to 1%, from 1.5%.
While policy makers kept their benchmark interest rate at a record-low 3%, officials have changed the dates of their decisions so they can react quicker to any Fed increase. Mexico will likely begin to raise borrowing costs in Q-3, according to economists surveyed.
Brazil has suffered a 21% collapse in the Real this year and is on the brink of losing its investment-grade status after giving up on its fiscal target. The country’s central bank raised its Key rate lst Wednesday to 14.25%, the highest among major economies, as it tries to damp above-target inflation and boost investors’ confidence.
In Malaysia, policy makers have intervened in the currency market by selling foreign-exchange reserves to support the Ringgit, which has fallen to a 16-yr low..
While growth in emerging markets is slowing, central bankers are finding that currency stability outweighs the potential economic drag from higher borrowing costs.
Currencies are very much under pressure, so it would not surprise me to see a bit more of what we have been seeing from some central banks in here.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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