Emerg­ing mar­kets let cur­ren­cies slide to stay com­pet­i­tive


The world’s emerg­ing economies are al­low­ing their cur­ren­cies to slide in a quest to re­main com­pet­i­tive, fol­low­ing main­land China’s de­val­u­a­tion of the yuan and the Amer­i­can dol­lar’s strength in an­tic­i­pa­tion of U.S. rate hikes.

The cur­ren­cies of emerg­ing na­tions in Asia have es­pe­cially suf­fered in re­cent weeks from mar­ket spec­u­la­tion that the U.S. Fed­eral Re­serve will lift in­ter­est rates this year — pos­si­bly as soon as Septem­ber.

Ac­cord­ing to So­ci­ete Gen­erale an­a­lyst Kit Juckes, those coun­tries “fear a re­sump­tion of sig­nif­i­cant cap­i­tal out­flows if the Fed does raise rates next month, as well as fear of fur­ther (yuan) weak­ness and con­cern about the slug­gish pace of global growth” — all of which are strength­en­ing the U.S. dol­lar, euro and yen.

Other fac­tors, in­clud­ing slump­ing prices of oil and nat­u­ral gas — ex­ports that many emerg­ing economies rely on heav­ily — are also pulling cur­ren­cies lower or prompt­ing gov­ern­ments to let their value drop.

On Thurs­day, Kaza­khstan de­cided to cease in­ter­ven­tion to sup­port the Cen­tral Asian na­tion’s tenge cur­rency, and al­lowed it to float freely to cope with the plung­ing price of oil — its pri­mary ex­port.

The re­sult was a his­toric 23-per­cent drop in value to 257 tenge to the U.S. dol­lar.

The ob­jec­tive of that move, says CMC Mar­kets an­a­lyst Jasper Lawler, was to al­low Kazakh goods to be­come more com­pet­i­tive with less ex­pen­sive for­eign im­ports.

“The gov­ern­ment and cen­tral bank de­cided to let (the tenge) free float in or­der to com­pete with the de­clin­ing cur­ren­cies of its two big­gest trad­ing part­ners; Rus­sia and China,” ex­plains Lawler.

This month’s sur­prise de­val­u­a­tions of the Chi­nese yuan — also known as the ren­minbi — by the coun­try’s cen­tral bank was sim­i­larly viewed by many observers as an ef­fort to re­verse the re­cent slump in ex­ports amid ac­cu­mu­lat­ing signs of an eco­nomic slow­down.

In re­sponse to main­land China’s cur­rency cut, Viet­nam widened the spread its cen­tral bank al­lows the dong to trade, pro­vok­ing a fall to its low­est ever level of 22.41 against the U.S. dol­lar.

In do­ing so, say forex ex­perts, Viet­nam ef­fec­tively de­val­ued the dong for the third time this year.

In Rus­sia, un­der pres­sure since 2014 from fall­ing oil prices and the ef­fects of Western sanc­tions over the Ukraine con­flict, the ru­ble re­sumed its de­cline against the dol­lar this week.

The ru­ble’s slump as Rus­sia’s econ­omy sank into re­ces­sion has had se­ri­ous con­se­quences for the coun­try’s neigh­bors — fig­ur­ing as a ma­jor fac­tor in Kaza­khstan’s de­val­u­a­tion.

Po­lit­i­cal Fac­tors at Play

Such weak­en­ing of cur­ren­cies has been rife across the world’s emerg­ing economies, with Lawler point­ing to this week’s plunge of the South African rand and In­done­sian rupee to his­toric lows against the U.S dol­lar as ex­am­ples.

But if In­done­sia’s cur­rency dip is due largely to de­pressed prices for com­modi­ties it ex­ports, Juckes says the slide of the Brazil­ian real and Turk­ish lira ex­tend be­yond pure eco­nom­ics.

Brazil, he notes, is fac­ing an enor­mous cor­rup­tion scan­dal as well as flatlin­ing growth, while the drop of Tur­key’s lira was caused by grow­ing se­cu­rity con­cerns and in­creas­ing po­lit­i­cal in­sta­bil­ity.

“It is the weak­ness of sen­ti­ment in (emerg­ing mar­ket forex) which is strik­ing — oil and China’s slow­down are the main fac­tors, but the Thai baht is weaker af­ter a deadly bomb blast, the Brazil­ian real’s woes are as much po­lit­i­cal as eco­nomic,” says Juckes.

Adding to that febril­ity is the resur­gent Amer­i­can dol­lar be­ing lifted by ex­pec­ta­tions of loom­ing U.S. in­ter­est rate hikes.

When it comes, that move will make re­turns on green­back in­vest­ments more lu­cra­tive than for­eign al­ter­na­tives — an even­tu­al­ity al­ready mo­ti­vat­ing spec­u­la­tors to take such po­si­tions while they are still af­ford­able.

But even if wor­ries over China’s growth and halt­ing eco­nomic ac­tiv­ity else­where con­vince U.S. pol­icy mak­ers to post­pone a rate hike be­yond the an­tic­i­pated Septem­ber pe­riod, the Fed will al­most cer­tainly be the world’s first ma­jor cen­tral bank to be­gin tight­en­ing its mon­e­tary pol­icy.

And that, Juckes notes, should mo­ti­vate in­vestors to exit emerg­ing economies they poured ex­cess liq­uid­ity into dur­ing the Fed’s pol­icy of keep­ing credit cheap in or­der to stim­u­late the world’s big­gest econ­omy.


Chi­nese men chat on the street near a bill­board pro­mot­ing de­posit rates for the U.S. dol­lar in Bei­jing, Satur­day, Aug. 22.

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