And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class.
Many emerging market investors are fixated on when the US Federal Reserve will begin raising interest rates and what the impact will be on EM assets. But Luis Costa, head of CEEMEA rates and foreign exchange strategy at Citi, reckons the “dollar surge” and the associated EM sell-off has already begun.
“FX is sensing the end of this benign cycle much earlier than other asset classes,” he tells beyondbrics. “It looks as though the dollar surge started at the beginning of July, with EM low yielders responding first. But now many high yielders are joining the dance.”
As Argentina’s sovereign debt soap opera dragged on, this week saw another legal judgement on toxic debts running into billions of dollars.
Yet while the ruling by Hungary’s supreme court on foreign currency mortgages could cost banks up to €3bn, the full implications are still to be fleshed out. One possibility is the retroactive rewriting of contracts – partially bailing out homeowners who took a failed punt on exchange rates.
CUCs and CUPs – know your pesos
Monetary reform rarely gets the pulse racing. But on the colonial streets of old Havana, Cuba’s pending monetary reform is one of the hottest topics around.
“My parishioners talk about it all the time,” says one local priest. Even World Bank officials are excited. Augusto de la Torre, the bank’s chief Latin America economist, has just penned a learned article on the subject. There are two reasons why everyone is getting worked up.
It’s not often that banking regulators are on the receiving end of praise. More often than not they’re only noticed after something goes badly wrong. But Poland’s regulator has got a lot right in its approach to foreign exchange mortgages – allowing Polish borrowers to deal rather better with forex loans than their near neighbours in Hungary.
You may have felt sorry for the hundreds of thousands of Hungarians who found out this week that they won’t be entitled to a borrower relief scheme. Don’t.
At the beginning of September, the Indian rupee hit a series of record lows. Having appeared to be immune to global economic crises in the past, India was suddenly at the forefront of the troubles in emerging markets. And all eyes were on its external balances.
Taking the wheel at the central bank, the new governor, Raghuram Rajan (pictured), announced a new swap window to coax dollars into India. When the window closed at the end of November it had brought $34bn into the country in just three months – far more than most people expected.
Venezuela keeps fidgeting with its tight foreign exchange controls. Earlier this week President Nicolás Maduro announced the government was restructuring the way it allocates greenbacks in its import-dependent economy.
He said the government was establishing the “National Centre of Exterior Commerce”, an umbrella organisation to oversee the main foreign exchange agency, Cadivi, as well as the country’s forex auction mechanisms.
Even the IndyCar Series now appears to have been hit by Venezuela’s currency jousts, another example of the country’s citizens desperately trying to skirt around the country’s tight foreign exchange controls.
On Friday, officials froze the hard currency allowance to automobile and motorcycle racers who compete overseas while they are being investigated over activities that might be “fictitious or overpriced”.
Venezuela imports almost everything these days so retailers hoping to stock up before the year-end festivities – who will need hard, foreign currency to do so – are biting their nails as the government goes on fiddling with its controls on foreign exchange.
“We will have here all of the elements for Christmas, all of it will be guaranteed, ” said Rafael Ramírez, the oil minister who was appointed to head the cabinet’s economic team last week. He said regular weekly dollar auctions using a system known as Sicad would begin on October 16.
The Indian rupee is down by over 10 per cent since May. While that may hurt some of the poorer off in society as prices of imported goods pick up, the better off may notice less.
But here’s a little kick for the privileged: prices are rising rapidly in fine dining restaurants.
Hungary’s bankers are in negotiations with the government and are “open and really trying to find a solution” to help households struggling with repayments on foreign-exchange denominated mortgages and other loans. So says Agnes Suto, spokeswoman for the Hungarian Banking Association.
The talks, which began in earnest on Monday, follow statements by ministers this month threatening legislation that would transfer the burden from households to the banks.
Some call it “the most complex exchange rate system in the world” – and with good reason.
In Venezuela, there is the official, fixed exchange rate, which for many Venezuelans is a mere fiction; there is the black market exchange rate, which is known as the “unmentionable” rate since it is a criminal offence to do so; and then there is the Sicad rate, a more recent invention that occupies a grey area somewhere in between.
Argentina’s President Cristina Fernández de Kirchner may have promised that she wouldn’t devalue the peso, and announced a series of measures to bring dollars back into the system.
But the black market isn’t listening. A day after breaking the 10 pesos barrier, the so-called “blue” dollar continued its upward march, hitting a new record high of 10.50 pesos on Wednesday.
While this may agitate the Fernández de Kirchner government, it doesn’t make everyone unhappy. Imported luxury car dealers, for example.
Foreign currency debt – that’s the problem facing György Matolcsy, Hungary’s central banker, known for his unorthodox policies. More than half the household and company debt in Hungary is not in forints. Peter Attard Montalto, emerging markets economist at Nomura, discusses with deputy emerging markets editor Jonathan Wheatley how Hungary is tackling this and the resilience of foreign investors despite such risks.