Cur­ren­cies Si­gnal Sprea­ding Vo­la­ti­li­ty

L'Opinion - - The Wallstreet Journal - Chel­sey Du­la­ney and Ira Io­se­ba­sh­vi­li.

The cur­ren­cies of places as di­verse as Rus­sia, Hong Kong and Ka­za­khs­tan slid last week, an alar­ming si­gn to some in­ves­tors who wor­ry that the geo­po­li­ti­cal vo­la­ti­li­ty af­fec­ting U. S. stocks is sprea­ding to other mar­kets.

Hong Kong’s dol­lar hit the lo­west le­vel al­lo­wed un­der a more than three-de­cade-old U.S. dol­lar- peg agree­ment, for­cing the de fac­to cen­tral bank to step in to de­fend the cur­ren­cy and sta­bi­lize it. Rus­sia’s ruble fell amid in­crea­sed U. S. sanc­tions against the coun­try and concern about a U. S. strike on Sy­ria, a de­cline that al­so contri­bu­ted to a fall in Ka­za­khs­tan’s tenge. Those moves came along­side a re­la­ti­ve­ly calm week el­sew­here, in which the Dow Jones In­dus­trial Ave­rage rose near­ly 2% and the U.S. dol­lar was lit­tle chan­ged against a bas­ket of cur­ren­cies.

Cur­ren­cy mar­kets have been stea­dy this year, and some wor­ry that in­ves­tors aren’t pre­pa­red for ma­jor glo­bal shifts, in­clu­ding tigh­te­ning mo­ne­ta­ry po­li­cy in the world’s big­gest eco­no­mies, that could threa­ten a years­long emer­ging-mar­kets ral­ly.

This week, in­ves­tors will al­so confront news that the U.S., U.K. and France laun­ched mis­sile strikes on Sy­ria in re­ta­lia­tion for a sus­pec­ted che­mi­cal-wea­pons at­tack. While of­fi­cials in­di­ca­ted there aren’t cur­rent­ly plans for more strikes, the at­tack is li­ke­ly to add to ten­sions bet­ween the U.S. and Rus­sia – which sup­ports the Sy­rian re­gime – and could in­ject more vo­la­ti­li­ty in­to emer­ging-mar­ket as­sets and prices for oil and other com­mo­di­ties that ma­ny of those na­tions ex­port.

When geo­po­li­ti­cal un­cer­tain­ty rises, fo­rei­gn- ex­change in­ves­tors tend to pull back on emer­ging- mar­ket cur­ren­cies and flock to those consi­de­red safe, such as the Ja­pa­nese yen.

Some in­ves­tors and ana­lysts wor­ry that fo­rei­gn ex­change could be­come the next are­na in a bur­geo­ning trade conflict bet­ween the U. S. and Chi­na. Chi­na’s yuan has thus far been re­si­lient to the trade spat, but ana­lysts fear a fur­ther rat­che­ting in ten­sions could drag down both the Chi­nese cur­ren­cy and a broad range of other Asian cur­ren­cies.

A JPMor­gan Chase & Co. in­dex that tracks ex­pec­ted vo­la­ti­li­ty in emer­ging- mar­ket cur­ren­cies rose last week to its hi­ghest le­vel since Fe­brua­ry’s mar­ket rout. Ano­ther JPMor­gan me­tric for ma­jor cur­ren­cies – such as the dol­lar and eu­ro – conti­nued to fall, sug­ges­ting that vo­la­ti­li­ty re­mains confi­ned to the more sen­si­tive cur­ren­cies of de­ve­lo­ping and emer­ging-mar­ket na­tions.

In­ves­tors say one ma­jor threat to cur­ren­cy-mar­ket sta­bi­li­ty is the gro­wing trade skir­mish bet­ween the U. S. and Chi­na. Al­though ten­sions have ea­sed since ear­lier this month, when the world’s two lar­gest eco­no­mies threa­te­ned to im­pose ta­riffs on bil­lions of dol­lars of each others’ goods, few ex­pect the calm to last.

Some in­ves­tors fear that Chi­na could re­ta­liate against U. S. pro­tec­tio­nist po­li­cies by de­va­luing its cur­ren­cy, which has ri­sen about 10% against the dol­lar over the past year.

“If Chi­na were per­cei­ved to be si­gna­ling it wan­ted a wea­ker yuan…that’s a pret­ty ef­fec­tive way of off­set­ting any trade gain the U. S. might try to achieve through ta­riffs,” said Brad Set- ser, a se­nior fel­low at the Coun­cil on Fo­rei­gn Re­la­tions.

Cur­ren­cies vul­ne­rable to a yuan de­va­lua­tion in­clude the South Ko­rean won, Sin­ga­pore dol­lar and Thai baht, as well as those of other ex­port-de­pendent Asian na­tions, ana­lysts said.

Es­war Pra­sad, a pro­fes­sor in trade po­li­cy at Cor­nell Uni­ver­si­ty, said any ef­fort to de­va­lue the yuan could qui­ck­ly back­fire on Chi­na. Its de­va­lua­tion of the yuan in 2015 spar­ked a glo­bal mar­ket sel­loff and set off a wave of ca­pi­tal out­flows that Chi­na spent around $ 1 tril­lion in re­serves trying to halt.

De­va­lua­tion “would be a tool that could ac­tual­ly hurt the Chi­nese a lot more than it would hurt the U. S.,” said Mr. Pra­sad. “It would real­ly set the Chi­nese back in terms of what they’re trying to ac­com­plish with fi­nan­cial-mar­ket ope­ning.”

The rise in glo­bal po­li­cy and trade ten­sions has roi­led other emer­ging- mar­ket cur­ren­cies. The Rus­sian ruble tum­bled 6.8% against the dol­lar last week af­ter the Trump ad­mi­nis­tra­tion an­noun­ced new sanc­tions against go­vern­ment of­fi­cials and bu­si­ness ma­gnates in Rus­sia. Ka­za­khs­tan’s tenge drop­ped 2.3% against the dol­lar, high­ligh­ting fears that the ruble’s de­cline will upend trade bet­ween the neigh­bo­ring coun­tries.

Meanw­hile, the Tur­kish li­ra fell 1.3% last week as the emer­ging- mar­ket vo­la­ti­li­ty shar­pe­ned in­ves­tor concerns over the health of that na­tion’s eco­no­my.

The de­clines mark a re­ver­sal from a months­long ral­ly that took emer­ging cur­ren­cies and stocks to mul­tiyear highs, as in­ves­tors bru­shed off un­cer­tain­ties sur­roun­ding glo­bal trade and po­li­tics to fo­cus on strong eco­no­mic growth in those na­tions. An MSCI in­dex of emer­ging-mar­ket cur­ren­cies has gai­ned around 2% this year, while its bench­mark emer­ging-mar­ket stock in­dex has ri­sen 1%. That com­pares with the S& P 500’s 0.7% de­cline and the Stoxx Eu­rope’s 2.6% fall.

A jump in vo­la­ti­li­ty could al­so pres­sure coun­tries whose cur­ren­cies re­main tied to the dol­lar, such as Sau­di Ara­bia and Qa­tar. Peg­ged cur­ren­cies are of­ten al­lo­wed to trade on­ly at a spe­ci­fic rate or wi­thin a tight band, and vo­la­ti­li­ty can make uphol­ding those le­vels more dif­fi­cult as other fac­tors – such as in­ves­tor flows in and out of the coun­try – buf­fet the cur­ren­cy.

Ma­ny de­ve­lo­ping na­tions lin­ked their cur­ren­cies to the dol­lar de­cades ago in a bid to in­su­late their eco­no­mies from vo­la­ti­li­ty. But the dol­lar’s surge from 2011 to 2016 and a mul­tiyear com­mo­di­ty- price rout for­ced ma­ny coun­tries to cut those ties as they be­came too ex­pen­sive to main­tain.

In 2014, Rus­sia’s cen­tral bank be­gan ta­king steps to al­low the ruble to float free­ly as the coun­try’s eco­no­my came un­der stress. Coun­tries in­clu­ding Ni­ge­ria, Egypt and Ka­za­khs­tan have aban­do­ned or loo­se­ned their ties to the dol­lar re­cent­ly.

“Pegs don’t fare ve­ry well in a mar­ket that’s vo­la­tile,” said Mark McCor­mick, North Ame­ri­can head of fo­rei­gn ex­change stra­te­gy at TD Se­cu­ri­ties. As mar­kets be­come less stable, “the pegs will be chal­len­ged,” he said.

Sau­mya Vai­sham­payan contri­bu­ted to this ar­ticle.

SIPA PRESS

SIPA PRESS

The Rus­sian ruble tum­bled 6.8% against the dol­lar last week.

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