Currency Woes Weigh Heavy on Emerging Markets
Emerging market currencies continue to lose ground against the USD, as investors flee the developing markets amidst contagion concerns stemming from the Turkey crisis, looming global debt of approximately $3.7 trillion, and fears of an intensified U.S. trade war.
The latest victim, the Argentine peso, has recently hit a record low, prompting the country’s central bank to boost interest rates to 60%. Despite the bank’s move, the peso has fallen an additional 10%, which was the most severe drop for the currency since it was floated in 2015.
In a similar vein, the Turkish lira, which has suffered heavily since President Trump doubled U.S. tariffs on Turkish goods, including steel and aluminum, extended losses against the USD this week.
The Indian rupee and the South African rand have also come under pressure given concerns surrounding their ability to repay dollar-denominated debts following an increase in U.S. interest rates.
Even the Chinese yuan is beginning to feel the effects of the global downturn, as well as the growing concerns over an intensification of the U.S. trade war. The yuan is currently down 8% against the dollar this month, but the People’s Bank of China (PBOC) has yet to intervene as they commonly done in the past. This indicates that the PBOC is comfortable with the current ongoing devaluation.
Perhaps the strangest, and most serious, of all the emerging market currency problems are found in Venezuela. Earlier this month, Venezuelan president Nicolás Maduro made the controversial decision to issue a new fiat currency called the “sovereign bolivar” to be backed by a cryptocurrency. The sovereign bolivar is re-denominated in order to remove zeros from the fleeting national currency, in an effort to deal with the runaway hyperinflation.
The effects have been felt outside of the forex markets, as the MSCI Emerging Markets Index, which covers more than 800 securities across large and mid-cap size segments and across style and sector segments in 24 emerging markets, is currently down roughly 11% YTD.