Emerging-market currencies remain in the spotlight, underlining worries about the ripple effects of the slow transition away from ultraloose monetary policy by major central banks as the Argentine peso hit a record low and the Turkish lira resumed a painful slide.
“Turkish and Argentine woes are in the ‘idiosyncratic’ category but it’s hard to shake the prevailing concern that [emerging-market] debt levels are too high, and that the gradual turn in global monetary policy is water-torture for highly-indebted current-account deficit economies,” said Kit Juckes, global macro strategist at Société Générale, in a note.
Indeed, the woes plaguing Turkey and Argentina appear to be largely homegrown. The U.S. dollar bought 35.75 Argentine pesos USDARS, +11.7707% on Thursday, up 5.1% after trading as high as 39.50 before Argentina’s central bank delivered an emergency rate increase, lifting its benchmark from 45% to 60% and pledging not to cut before December. The sharp moves came after Argentine President Mauricio Macri on Wednesday said that he would ask the International Monetary Fund to speed the release of standby funds from the country’s $50 billion credit line.
Macri’s remarks were “intended to restore investors’ confidence in the government’s capability to fund itself in 2019 without issuing debt. But investors interpreted it as a sign of urgency and nervousness,” said Elsa Lignos, global head of FX strategy at RBC Capital Markets, in a Thursday note.
The Turkish lira USDTRY, +4.3548% traded not far off the all-time low it set in mid-August. The slide accelerated Thursday after news reports said the deputy governor of the nation’s central bank was set to resign. The dollar fetched 6.7262 lira, up 4.1%, after trading near 6.85 lira. The lira is down nearly 44% versus the dollar so far this year, with confidence rattled in part by the confrontational tone of President Recep Tayyip Erdogan, who has attacked the central bank’s independence and railed against rate increases.
The lira’s fall hasn’t provoked a broader panic, but has stoked concern about the exposure of European banks to Turkey and has also been blamed for denting appetite for emerging market assets.
The renewed troubles for the peso and the lira, meanwhile, cut short an emerging market bounce following the announcement Monday of a preliminary agreement on trade between the U.S. and Mexico.
“Most emerging market currencies are on the back foot against the US dollar,” said Elwin de Groot, head of macro strategy at Rabobank.
He noted that the dollar is marching toward 6.85 Chinese yuan USDCNH, +0.4222% in offshore trade, while the South African rand USDZAR, +2.2814% whose ticker symbol is ZAR, was also under pressure. The dollar was up 1.1% versus the South African unit in recent trade at 14.57 rand.
“Adding all emerging market currencies from A to Z, the losses currently stand at -1.77% month-to-date, as measured by the MSCI Emerging Markets FX index,” he noted.
Expectations the Federal Reserve will continue on its path of gradual rate increases and balance-sheet unwinding add to the troubling backdrop for emerging markets overall. Higher U.S. yields, and in particular a stronger U.S. dollar, can put strain on emerging markets given heavy borrowing in the U.S. currency. A stronger dollar can make it more difficult to service dollar-denominated debt.
“Of course, some EM currencies are more vulnerable than others,” said Oliver Jones, economist at Capital Economics, in a note. “Both worries about contagion in Turkey and rising rate expectations in the U.S. have tended to hit the currencies of EMs with large current-account deficits hardest (see chart below).
The current account is a measure of a nation’s balance of trade, net earnings on foreign investments and net cash transfers. After Turkey and Argentina, South Africa and Colombia USDCOP, +0.91%
After Turkey and Argentina, South Africa and Colombia have the next-largest deficits as a share of gross domestic product, Jones said, while noting that the currencies of emerging markets with significant current-account surpluses, including Thailand USDTHB, +0.1530% South Korea USDKRW, +0.05% and Malaysia USDMYR, -0.2908% have been relatively resilient.
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