Emerging market (EM) official foreign exchange (FX) reserves have been falling steadily by an average of $58bn a month since reaching an all-time high of $8.17tn in June 2014. This has mainly been due to reductions in China and Russia, but is accentuated by declines elsewhere. Total reserves have also been falling year on year from December 2014, with the cumulative yearly decline accelerating to $385bn in March 2015 (see chart below).
Typically, reserve reductions indicate balance-of-payments pressures and/or central bank interventions in currency markets to dampen exchange rate depreciations. Greater exchange-rate flexibility across EMs and previous reserve accumulations alleviate most immediate concerns, including in China and Russia, but much depends on the direction of commodity prices and global market reactions to the eventual increase in US policy rates. Read more
By Pablo Cisilino, Stone Harbor Investment Partners
After two years of low returns and high volatility, investors are questioning the thesis that supports investing in local currency debt from emerging markets. Notwithstanding the current cyclical factors that, in the short term, seem to support the US dollar, we believe the main structural features that make most emerging markets and currencies an attractive investment destination are still in place.
Some of the most important factors include cleaner sovereign balance sheets and demographic profiles that favour younger workforces and growing populations. In our view, the re-pricing of the asset class over the last couple of years has created considerable value. Read more
Blink and you missed it. The day after the US Federal Reserve appeared on Wednesday to put back the date of its long-awaiting interest rate rise, analysts at Bank of America Merrill Lynch wrote to clients: “Emerging market currencies temporarily halted their losing streak with a dovish Federal Open Market Committee sending the USD lower.”
“Temporarily” is right. The Brazilian real closed at about R$3.21 to the dollar on Wednesday from its open of R$3.24, a rare day’s gain in a two-month slide. But on Thursday it was back on course, falling quickly beyond R$3.30 before recovering a bit, an intraday move of nearly 3 per cent. In less dramatic manner, the Turkish lira, Russian rouble and South African rand all resumed their downward slides, too. Read more
One of the few African proverbs that appears to exist other than in the minds of journalists searching for an intro is: “When the elephants fight, the grass suffers”.
Recently, the gyrations in the mastodonic major currencies have placed pressure on the EM countries maintaining pegs or ceilings or otherwise actively managing their easily-trampled exchange rates.
For those targeting the euro, the fall in the single currency after the European Central Bank embarked on QE has increased the challenge in holding their exchange rates down. For economies with dollar pegs, the question is rather whether they can stand the overall loss of competitiveness entailed in following the US currency upwards. For the moment, though, it seems unlikely that a large number of pegs will come undone or ceilings be destroyed. Read more
Fears over “original sin” are once again stalking emerging markets (EM). As the US dollar surges against most EM currencies, a multi-year EM binge on US dollar debt is morphing into an inevitable hangover.
As the chart below shows, the international borrowings of many developing countries have vaulted higher since the 2008 financial crisis. A significant portion of these debts are in US dollars, setting up scenarios for “original sin” – in which the dollar debt servicing requirements far exceed borrowers’ direct ability to generate dollar revenues. Read more
By Paul McNamara, GAM
Events in recent months have given rise to some of the best opportunities in emerging market (EM) currencies that we have seen for some time. Following the sharp fall in commodity prices in the fourth quarter of 2014, the currencies of a number of commodity producers struggled.
These developments appear to have triggered a broader sell-off in EM currencies, with those that should benefit from lower commodity prices, such as the Indian rupee, Turkish lira, Mexican peso and Polish zloty, weakening as well. We believe these moves provide the key opportunities for 2015. Read more
By Jonathan Fenby, Trusted Sources
As reform has become the principal touchstone for emerging markets (EM), the importance of the political and personal agendas of the leaders in each of the seven countries primarily concerned has emerged as a major factor. This applies as much on the positive side – India, China, Indonesia and Mexico – as on the negative slate – Turkey and South Africa. For its part, Brazil is on a knife edge in policy terms.
We would score them as follows on a scale of +2 to -2 taking into account what they have achieved, what they have committed themselves to and the impact of political, economic and social factors on prospects for structural change needed to achieve sustainable growth. Read more
Portfolio flows into emerging markets (EM) suffered their sharpest slump in December since the 2013 “taper tantrum” as the Russian currency crisis and sliding oil prices intensified risk aversion among both equity and debt investors, according to estimates by the Institute of International Finance (IIF), a global association of financial institutions.
The IIF’s EM Portfolio Flows Tracker, released on Tuesday, estimated total outflows from EM at $11.5bn during the month, with flows out of debt accounting for $7.8bn and flows out of equities reaching $3.7bn. The only EM area to register net inflows was emerging Asia, following foreign buying of Indian bonds and equity issuance throughout the region (see chart). Read more
Pity the poor Mexican peso. Despite the view in the market that Latin America’s second biggest economy is set to outperform its emerging market peers in 2014, the currency has been taking it to the chin since the start of the year. Read more
Previously, beyondbrics looked at stock exchange winners and losers of 2013. Now it’s the turn of the EM currencies.
Which currencies felt the full force of the 2013 sell-off, and which survived unscathed? Read more
As Christmas approaches in London, flutter-hungry bookies start taking bets on the likelihood of snowfall.
Are EM currency falls this month a safer bet?
Benoit Anne of Société Générale has crunched the numbers and found that EM currencies tend to lose value in December, to a greater extent than the yearly average. Read more
After Unilever, it was the turn of Casino, the French retailer, to feel the sting of emerging market currency fluctuations on Monday.
The company, which generates two-thirds of its trading profit from Latin America and Asia, said while third quarter like-for-like sales from these markets grew 12.5 per cent, the weakening of currencies such as the Brazilian real and the Argentine peso this summer meant sales, when converted into euros, actually fell 6.2 per cent during the period.
The currency headwinds meant overall group sales ended the quarter flat at €11.8bn compared to the same period last year. This despite marked improvement in its key French market. Read more
Emerging market economies with current account deficits have had little to smile about since Ben Bernanke first mentioned ‘tapering’ of QE in May.
This chart (after the break) from Aberdeen Asset Management shows the strong correlation between current accounts and currency strength. Countries such as Indonesia, India, Turkey, South Africa and Brazil, running large deficits, are being punished with drastically weakening currencies. Read more
Emerging market currencies that were the hardest hit by the summer’s sell-off rallied on Monday after Lawrence Summers pulled out of the race for the Federal Reserve, raising hopes that easy monetary policy in the US will continue for longer.
The South Africa rand climbed 1.3 per cent to R9.807; the Turkish lira gained 1.4 per cent to TL2.02600 and the Indian rupee – which hit a succession of record lows earlier in August – rose 1 per cent to Rs62.83, a near one-month high. Read more
As the G20 kicks off in St Petersburg, one of its dominant themes is a rising swell of complaints over the effects of US monetary policy.
Simply put: the US tapers quantitative easing, and the days of easy money for emerging markets are over – and currencies get hit. So who’s complaining, and how bad has it been? Read more
From stocks to bonds to currencies, whichever way you cut it, it’s been a quarter to forget for emerging markets. Having soared to new heights at the start of the year as money gushed in, the asset class suffered a rude awakening in June after the US Federal Reserve announced that it could soon start scaling back its massive bond programme. Here’s a review of the quarter in a couple of charts. Read more
Here’s a question to wow them with at the next pub quiz: what’s the best-performing EM currency over the past six weeks?
Answer – probably, Argentina’s “blue” peso – if you were to look at the widely-watched black-market dollar rate from the other way around. Argentina’s blue rate is the name for the illegal exchange rate that is widely-followed now that Argentina’s official peso has become a virtually unconvertible currency. Read more
Emerging market assets suffered another bout of sell-off on Wednesday after the US Federal Reserve said it could start reducing the pace of its bond buying programme this year and end it altogether around the middle of next year.
The MSCI Emerging Markets Index fell 1.3 per cent to close at its lowest level since last September. Read more
The coming end of QE has loomed very large this month, not least in emerging markets. Too large, says Fred Neumann of HSBC, who argues that while the gradual reduction of the US Federal Reserve’s huge monetary easing is important, it will be mitigated by the rush of new cash coming from elsewhere, principally the Bank of Japan. Read more
It’s often wishful thinking, but there comes a point in a mass sell-off when investors decide enough is enough. And so it was on Wednesday, with a near-1 per cent bounce in the Indian rupee against the US dollar, after weeks in which it had been in the forefront of a global plunge in emerging markets. Read more