Emerging market currencies take a hammering
EMERGING market currencies fell, extending the longest stretch of weekly declines since 2000, as Malaysian assets tumbled, Turkey’s lira touched a record low for a third day and the rouble and Russian stocks retreated with oil.
A gauge tracking 20 of the most-traded developing nation currencies dropped 0.4 percent.
The ringgit weakened to the lowest level since 1998 and the Taiwanese dollar lost 0.9 percent. The currency measure has fallen eight consecutive weeks as the prospect for higher US interest rates and the shock devaluation of the yuan magnified the risks facing developing nations.
The MSCI Emerging Markets index of equities slid to a four-year low and bonds fell.
China’s devaluation “will be something that will shape the rest of the year for emergingmarket currencies, especially the fact that people view this as a clear indication that the Chinese authorities are worried about the state of their economy”, said Anders Svendsen, an analyst at Nordea Bank in Copenhagen.
Svendsen expects emerging currencies will stay lower for the rest of the year, with a trough around the time the Fed lifts interest rates, probably next month. Underpinning the potential fallout of a weaker yuan on countries that export to China, Morgan Stanley dubbed Brazil’s real, Peru’s sol and Asian currencies in South Korea, Thailand and Singapore as part of the “Troubled Ten”.
Fragile Five
The “lukewarm” recovery means the world’s secondlargest economy would not be able to rely on exports to drive expansion, said Hans Redeker, the London-based global head of foreign exchange strategy at Morgan Stanley, which coined the so-called Fragile Five in 2013.
Investors pulled money from emerging-market equity funds for a fifth consecutive week, according to a report from EPFR Global. The MSCI Emerging Markets index retreated 1.1 percent to 854.12 points by 12.34pm in London.
Bonds also sold off yesterday. Malaysian debt underperformed peers in Asia and Turkish notes led declines in emerging Europe.
Both countries have been rattled with political crises that are driving out investors.
In Turkey, where coalition talks failed last week, the Borsa Istanbul 100 index headed for the lowest close since March and the lira slid to as weak as 2.8613 per dollar, an all-time low. Malaysian shares sank to a three-year low and the ringgit depreciated 0.5 percent to 4.0995 per dollar.
The currency’s steepest slide since 1998 is evoking memories of the clash between then-prime minister Mahathir Mohamad and hedge-fund manager George Soros.
Brazil’s real lost 0.4 percent after nationwide street protests on Sunday against Brazilian President Dilma Rousseff kept the pressure on the government.
FORGET the “Fragile Five.” These days, strategists at Morgan Stanley are worried about what could be called the “Troubled Ten.”
That’s how many nations they say are particularly at risk since China devalued the yuan. While the analysts have not used the term themselves, it’s as good a description as any for the currencies – from the Brazilian real to Peru’s sol and South Korea’s won – which have trading ties making them susceptible to a slowdown in the world’s second-biggest economy.
“It’s all about vulnerability,” said Hans Redeker, the Londonbased global head of foreignexchange strategy at Morgan Stanley.
“Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China.”
Morgan Stanley was right about the “Fragile Five”. Those currencies include four of the developing world’s eight worst performers since the phrase was coined in 2013. The real, together with Turkey’s lira, South Africa’s rand, the Indian rupee and Indonesian rupiah, have suffered as rising global interest rates make it more difficult for the countries to finance their current-account deficits.
For Redeker, the biggest challenge now is a lack of global growth.
While central banks in Japan, Europe and the US have rolled out record stimulus, the world’s economy is set to expand at the slowest pace since 2009 this year, according to International Monetary Fund forecasts.
That “lukewarm” recovery means China won’t be able to rely on exports to drive expansion, said the strategist, whose firm was the second-highest ranked forecaster of the dollar versus the yuan.
The slower growth will also put China’s trading partners in the crosshairs.
There’s some overlap between the “Fragile Five” and the new at-risk list, with the rand and real to be found in both. Also vulnerable to China’s slowdown are the Thai baht, the Singapore and Taiwan dollars, the Chilean and Colombian pesos, Russia’s rouble and the won and the sol, according to Redeker.
China is the top export destination for most of the countries on the troubled 10 list. The nation accounted for 37 percent of South Africa’s exports and 30 percent of South Korea’s in 2014.
Investors were jolted last week as China implemented the biggest depreciation of the yuan since 1994, raising concern that authorities plan to use a lower exchange rate to shore up the weakest growth in more than two decades.
The move rippled through global markets, weakening the currencies of the Asian countries that compete with China for exports and sending developing-nation stocks into a bear market.
“The move by China has introduced further concerns on foreign-exchange valuations in emerging markets,” said Chris Chapman, a London-based fixed-income trader at Manulife Asset Management, which oversees $302 billion (R3.86 trillion).
Even with the yuan roiling markets, investors still see the Federal Reserve sticking to its plan to raise interest rates for the first time in nine years.
“We are going to have at least one more episode of pain” before emerging-market currencies become a compelling buy, Steven Englander, the global head of Group-of-10 currency strategy at Citigroup, said.
It will take a sizable fiscal package to boost China’s economy and reverse the selloff in emerging markets, according to Redeker. “The biggest concern is that we are not going to turn the corner and the economic performance in China will continue to disappoint,” he said. “Investors will watch China data closely and trade the yuan accordingly.”