Emerging Market Currencies Fluctuate Greatly

Emerging market currencies were hit hard recently, with Brazil, Turkey and South Africa plumbing new lows against the US dollar due to pessimism over the outlook for the global economy.

The Financial Times states that the Brazilian real came down 1.2 per cent to R$4.22, which was its lowest since it was introduced in 1994.

The decline was just as notable in South Africa and Turkey, where the rand and the lira hit record lows, while Indonesia’s rupiah and Malaysia’s ringgit also tumbled.  This week, emerging market currencies are up slightly.

What are the reasons for the great changes in the value of these currencies?

This month, the Fed did not raise interest rates. However, The Financial Times states that there is a global recoil from emerging markets in anticipation of rising U.S. interest rates.

There are also collapsing commodity prices and escalating concerns over China’s economy.

FT writes:

“In a further parallel, the stronger dollar is encouraging money to flow out of risky, emerging Asian economies and into the rich world, with the biggest losers likely to be those countries with the largest current account deficits.”

FT writes that Brazil’s bonds have received a junk credit rating in recent weeks by Standard & Poor’s.  That sent the Brazilian currency 6.8 per cent lower against the dollar.

Other currencies in the Latin American region went down, too, including the pesos of Colombia, Chile and Mexico, all down at least 0.8 per cent.

Asian economies are being affected by slowing growth and ebbing demand in China for the raw materials that led to a boom in commodity prices.

Hopes that an economic recovery in the developed world can counteract the impact of China are also faltering with the International Monetary Fund cutting its global growth forecast for 2015 from 3.5 per cent to 3.3 per cent.

Global asset managers are already feeling the pinch. UK fund house Aberdeen Asset Management recently reported the ninth quarter of outflows from its emerging market funds and a drop in assets under management.

In other economic news, Robert Shiller, the economist who foresaw the coming of the tech and real estate bubbles in the past decade, said earlier this year that the U.S. is potentially headed for a bond-market bubble. High-end housing and art markets also seem to be headed in the same direction.

Investing.com states that the bubbles are triggered by the hundred-billion dollar debt in the energy sector, and particularly in the fracking business.

Oil prices may have a doubled value today, but most borrowing companies were not cash-flow positive. The current trend of production oversupply makes the situation comparable to the 1980s, writes investing.com. At that time, companies kept on producing an over-supply of crude due to desperate measures.

http://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html?_r=0

http://www.dailyfx.com/forex/market_alert/2015/09/23/Emerging-Market-Currencies-Extend-Dive-Versus-USD-Amid-Fed-Risk-Talk.html

http://www.investing.com/analysis/it%E2%80%99s-time-for-a-rate-hike-265275

http://www.bloomberg.com/news/articles/2015-09-24/emerging-stocks-set-for-fourth-day-of-losses-as-thai-baht-slides

http://www.ft.com/intl/cms/s/0/dc618e48-62c4-11e5-9846-de406ccb37f2.html#axzz3mzea5YGS

http://www.ft.com/intl/cms/s/0/eb94d9b6-3519-11e5-bdbb-35e55cbae175.html#axzz3nEL3iVUp

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