EM currencies: judgement days

Not all currencies are equal in the great sell-off of emerging markets. While the South African rand is down 10 per cent against the USD since the start of May, the Indonesian rupiah and the South Korean won have dropped only slightly – and the Hungarian forint is actually up.

The same is true with interest rates: while yields have soared in South Africa, Turkey and Brazil, they have barely moved in India, Thailand and Malaysia. As Barclays explains in a report, investors are largely judging things right in separating the wheat from the chaff: they’re selling countries that depend on international financial flows and so face the biggest risks.

Here are the runners and riders, courtesy of Bloomberg:

Barclays plots the performance of key EM currencies and EM rates against an index of economic vulnerability indicators, including short-term foreign debt, current account balances, inflation and domestic savings rates.

The correlation in rates is particularly dramatic:

Source: Barclays







In currencies, the picture is slightly less clear but the pattern is the same – the more vulnerable the country on economic grounds, the bigger the sell-off since May 2:

Source: Barclays

Barclays analysts say that Asian markets are generally less vulnerable than those in other EM regions. But there are exceptions. As the charts, suggest, Indonesia has weathered the storm remarkably well given its fairly high vulnerability to external shocks. This may not last, says the report:

Going forward, we think rates in Asia will continue to be well supported, but with limited scope for a rally. Global EM investors are likely to continue to focus on the performance of assets elsewhere, where the gains or losses could be much higher. In Asia, Indonesia looks vulnerable to further correction, while Indian rates may become less supported if the INR moves sharply lower, in our view. The IDR has performed better than its ranking; however, that is probability related to the illiquidity of the market and BI [central bank] support.

With investors nervous about the possible end to the US Fed’s QE, which may not acutally materialise for months, the current turmoil in the markets clearly has further to run. Friday’s will be a particularly anxious day. As Credit Agricole puts its succintly in its daily report entitled What Matters Today: “All eyes will be on the US jobs report.”

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