Emerging Market Currency Selloff

The emerging market (EM) currency ‘contagion’ has started to take hold with a widespread fall on Friday. EM currencies endured their worst selloff in five years as the markets grew concerned about the fallout from the Federal Reserve tapering of monetary stimulus, compounded by political and financial instability.

The biggest drop in the Argentine Peso (ARP) in over a decade on Thursday sparked a flurry of action on Friday. The ARP lost more than 11% to close at 8 against the dollar on Thursday evening. This was a result of Argentine policy makers deciding to end their aggressive support of the peso and allowing it to devalue. The ARP closed the week down almost 20% versus the dollar.

The Turkish Lira (TRY) fell to a record low for the 10^th consecutive day, closing the week at 2.33 against the dollar. The South African Rand (ZAR) fell to a level weaker than 11 per dollar for the first time since 2008. In Asia, the Indian Rupe (INR) fell to a two month low against the dollar, while the Indonesian Rupiah (IDR) fell to a two week low. Meanwhile the Australian Dollar (AUD), a favourite of the carry trade, fell to $0.86881, a three year low.

Tim Ash, head of emerging market research at Standard bank, said people had grown uncomfortable with emerging markets. “The story is about fundamentals – so many emerging markets have dodgy fundamentals ... you’ve got Turkey, Brazil, Argentina, Egypt – everyone’s got problems.”

He added that Friday’s selloff was “pure contagion ... even the good guys that investors like – like Poland and Mexico – are being pulled lower”.

Mr. Llyod Blankfein, CEO of Goldman Sachs, speaking at the World Economic Forum in Davos, said that emerging market currencies were high yield, but also high risk. He stressed that there were opportunities in emerging markets longer term.

The Federal Reserve’s bond-buying (Quantitative Easing) program, which provided cheap money, boosted risk sentiment and sent investors chasing return in high yield emerging markets, is now being unwound. Emerging markets enjoyed large capital inflows which have now started to reverse; capital flows into the developing world have fallen to 4.5% of their gross domestic product this year from a high of 7% in 2008, according to the Institute of International Finance.

Many emerging market countries came under pressure in 2013 on the back of speculation on when tapering would commence, a phenomenon referred to as ‘taper tantrum’. Those who are most exposed include countries who have weak fundamentals such as high inflation, large current account deficits, stagnated growth, low levels of foreign exchange reserves and lagging industry. Countries such as South Africa, Turkey, Argentina, India and Brazil are all likely to come under more pressure as the Fed continues unwinding its stimulus package, culminating in a total withdrawal by the end of 2014.

The emerging market (EM) currency ‘contagion’ has started to take hold with a widespread fall on Friday. EM currencies endured their worst selloff in five years as the markets grew concerned about the fallout from the Federal Reserve tapering of monetary stimulus, compounded by political and financial instability.

The biggest drop in the Argentine Peso (ARP) in over a decade on Thursday sparked a flurry of action on Friday. The ARP lost more than 11% to close at 8 against the dollar on Thursday evening. This was a result of Argentine policy makers deciding to end their aggressive support of the peso and allowing it to devalue. The ARP closed the week down almost 20% versus the dollar.

The Turkish Lira (TRY) fell to a record low for the 10^th consecutive day, closing the week at 2.33 against the dollar. The South African Rand (ZAR) fell to a level weaker than 11 per dollar for the first time since 2008. In Asia, the Indian Rupe (INR) fell to a two month low against the dollar, while the Indonesian Rupiah (IDR) fell to a two week low. Meanwhile the Australian Dollar (AUD), a favourite of the carry trade, fell to $0.86881, a three year low.

Tim Ash, head of emerging market research at Standard bank, said people had grown uncomfortable with emerging markets. “The story is about fundamentals – so many emerging markets have dodgy fundamentals ... you’ve got Turkey, Brazil, Argentina, Egypt – everyone’s got problems.”

He added that Friday’s selloff was “pure contagion ... even the good guys that investors like – like Poland and Mexico – are being pulled lower”.

Mr. Llyod Blankfein, CEO of Goldman Sachs, speaking at the World Economic Forum in Davos, said that emerging market currencies were high yield, but also high risk. He stressed that there were opportunities in emerging markets longer term.

The Federal Reserve’s bond-buying (Quantitative Easing) program, which provided cheap money, boosted risk sentiment and sent investors chasing return in high yield emerging markets, is now being unwound. Emerging markets enjoyed large capital inflows which have now started to reverse; capital flows into the developing world have fallen to 4.5% of their gross domestic product this year from a high of 7% in 2008, according to the Institute of International Finance.

Many emerging market countries came under pressure in 2013 on the back of speculation on when tapering would commence, a phenomenon referred to as ‘taper tantrum’. Those who are most exposed include countries who have weak fundamentals such as high inflation, large current account deficits, stagnated growth, low levels of foreign exchange reserves and lagging industry. Countries such as South Africa, Turkey, Argentina, India and Brazil are all likely to come under more pressure as the Fed continues unwinding its stimulus package, culminating in a total withdrawal by the end of 2014.