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These Currencies Could Be The Next To Tumble In Global FX Wars
Earlier this week, Kazakhstan moved to a free float for the tenge, prompting the currency to plunge by some 25%.
The move came after the country’s exporters could no longer stand the pain from plunging crude prices and the RUB's relative weakness. China’s move to devalue the yuan was the straw that broke the camel’s back.
Here, summed up in one chart, was the problem:
This "may prop up growth in the country and help [the] fiscal sector to accommodate external pressures in case they continue to mount," Deutsche Bank said, commenting shortly after the news hit.
In many ways, the decision to float the tenge (like the move by Vietnam to allow the dong to swing in a wider channel) is emblematic of what's taking place in FX markets from Brazil to South Korea.
Shockwaves from China’s devaluation have conspired with sluggish global demand and an attendant commodities slump to wreak havoc on developing market currencies the world over. For Asia ex-Japan, the outlook is especially dire, as the PBoC’s FX bombshell threatens to undermine regional export competitiveness, put upward pressure on the region's REER, and will likely serve to further depress demand from the mainland.
Idiosyncratic political events have only made the situation worse for the likes of Brazil, Turkey, and Malaysia.
Here are some brief comments from Citi:
Is this Asian Currency Crisis Part 2? It sure feels like it. It would be more accurate to call it the Great EM Deval-Meltdown as emerging market currencies are in freefall and another peg bites the dust overnight (Kazakhstan). There are few pegs left besides Saudi Arabia and EURCZK and both are under pressure. The 1-year SAR forwards are at 12-year wides and EURCZK is pinned to the 27.00 floor. Take a look at the white chart below right which shows Malaysian Ringgit and you can get a sense of the 1997/1998 crisis vs. now. The moves are not as big yet and volatility has not exploded in the same way but it feels like we are in an EM crisis right now. Gold agrees. RIP BRICs thesis.
Against this backdrop, Bloomberg has taken a look at which currencies "are among those most at risk from this conflux of global developments." Here’s more:
- Saudi Arabia’s riyal: Armed with $672 billion in foreign reserves, Saudi Arabia, the world’s largest oil exporter, has enough capacity to hold the peg, according to Deutsche Bank AG. Nonetheless, speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low. The forwards, contracts used by traders to bet on or hedge against future price moves, fell to the weakest since 2003, implying about a 1 percent decline in the riyal over the next 12 months.
- Turkmenistan’s mana
- Tajikistan’s somoni
- Armenia’s dram
- Kyrgyzstan’s som
- Egypt’s pound: The country has limited investors’ access to foreign currencies amid a shortage since the 2011 Arab Spring protests. Traders are betting the pound will weaken about 22 percent in a year, according to 12-month non-deliverable forwards.
- Turkey’s lira: It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.
- Nigeria’s naira
- Ghana’s cedi
- Zambia’s kwacha
- Malaysia’s ringgit: The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.
Below, find a bit of color on the three highlighted currencies followed by comments from Deutsche Bank on the vulnerability of various pegs going forward.
* * *
As far as Saudi Arabia and the peg go, it's worth noting that as we outlined in detail (here and here), the Kingdom's financial situation looks to be deteriorating as evidenced both by the country's move to open its stock market and by the decision to tap the bond market for cash amid a draw down in FX reserves. As we put it back in June, "the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position." Here's a bit of additional color from Citi:
The impact on FX reserves has been marked. The Saudi government traditionally parks its excess revenues with SAMA, the central bank, rather than with a sovereign wealth fund as is the case in some other GCC countries. As a result, fiscal reserves are co-mingled with FX reserves as SAMA invests the government deposits alongside the rest of its funds. Figure 2 shows that since last summer, when oil prices began to fall, the Saudi government has drawn down deposits with SAMA to the tune of over $100bn as it sought to finance a growing deficit. As a consequence, this has brought down SAMA’s overall FX reserve position.
But the decline in headline reserves is a significant factor fuelling speculation in markets that the Saudi Riyal peg to the dollar may be unsustainable, and that Saudi may follow China’s lead and revalue (depreciate) or depeg its currency. 12-month forward rates have risen to 3.78 SAR to the dollar in the past week, not a huge change from 3.75 but still the highest divergence from the spot rate since 2009, which is noteworthy.
And some color on Egypt, also from Citi:
Although we had expected the recovery in the economy to suffer periodic setbacks, it is clear that the Central Bank of Egypt (CBE) has become concerned. Not only has it not raised rates in response to the rise in inflation in 1H 2015, but it also allowed the EGP to weaken further in July. Although this step down in EGP was of a smaller scale than in January, it may signal that with no significant improvement in the growth of current account outlook in 2H 2015 the CBE may allow further similar scale periodic currency adjustments.
As for the lira, we've said quite a bit why it's been under so much pressure of late. In short, political turmoil and an escalating civil war have plunged the country into crisis, undermined confidence, and sent stocks into bear market territory. For the full breakdown, see here.
Finally, we close with comments from Deutsche bank:
Where next?
The immediate implications of the Kazakh devaluation for the rest of the EMEA region should not be exaggerated. Kazakhstan’s huge loss of competitiveness relative to its largest trading partner, with which it has a customs union, made it unique. The pressure on other dollar pegs is nevertheless understandable and to varying degrees justified. Before the tenge was allowed to float freely this week, it was 11% stronger than it had been on average over the last 10 years. The four other major currencies in the region that are even more overvalued according to this admittedly simple metric all still maintain dollar pegs: the Saudi Riyal, the United Arab Emirate dirham, the Nigerian naira, and the Egyptian pound. Bulgaria, Croatia, and Romania also peg or manage their exchange rate regimes tightly, but against the euro rather than the dollar; and in their cases, currencies look more fairly valued.
Incidentally, you would have seen all of this coming and would have been well on your way to understanding how structurally important collapsing crude prices are to global finance had you simply read "How The Petrodollar Quiety Died, And No One Noticed," last November.
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all good info but not easy to trade.
Are there any reverse ETF's emerging market FX?
Anyone?
Would EM stock reverse ETF do the same trick?
EEV
Yes but you can only cash in & out in USD... what's the point?
We have a large CD in an EM curency with 9% interest and want to hedge so that we stay neutral to preserve the profit. So if the EM/USD pair is balanced we will always have a 9% profit per year.
there is no trade there is only Zuul.
I think by the time we turn up all the shells it will be discovered that someone has already absconded with the pea...
eat your peas
Sure is making Putin squirm.
...oh, wait a sec....
So, China's Yuan devaluation will be the Black Swan that brings down the Stawk Market......whocouldanode?
so - japan can kiss all those 'rich' chinese flying to tokyo to buy up expensive items - goodbye; meaning another economic hit for japan. 124.6 to 122.0 yeah. nice. it's all connected.
you lost me at " allow the dong to swing"
Yuan tenge som dong?
Bob Paulson said back in Nov. "Luckily the NarcoDollar is still recycling liquidity back to wall street or they would be seriously screwed. The only chance of that happening would be if the grown drugs were superceded by the synthetic chemical drugs, thus preventing the US military from cornering markets in Columbia and Afghanistan (and Mexico as a traffic hub).
Come to think of it, maybe the key to US Narcodollar hegemony is keeping the synthetic drugs priced out of the world market, sortof like...oil"
May I humbly add the Petro Dollar not only is no longer, the US dollar is history as The Reserve currency? The US has made itself so very disgusting worldwide that many other countries are joining other banking systems which exclude the US entirely. Soon Israel will just be using the US for farmland and really stupid people to cheer on the mass media while devouring dry extruded chemicals.
What we have here is simultaneous distress in two key EM economies: China and Saudi Arabia. The Chinese have cut back the free flow of currency(debt), and with it their ENORMOUS purchases of commodities over the last decade which has fueled an unsustainable world-wide boom among commodity producers.
The Saudis have trouble at home. Americans tend to think of Saudi Arabia as a monolithic, rabidly Islamic state. But like any kingdom, there are tensions under the placid exterior. Ibn Saud, the founder of the kingdom, rode to power on the shoulders of Wahabi fundamentalism -- and then when he had secured his rulership, abruptly knocked his erstwhile jihadi supporters down a couple of pegs and forced them to accept his rule. He was, like all dynastic founders, charismatic, ruthless, pragmatic, and competent. He was also much closer to the outlook of the illiterate, fundamentalist tribesmen than his latter-day descendents can ever be. He grabbed power BEFORE oil became the lifeline of the developed world and made his family richer than Croesus ever was. His sons and grandsons all have Western education, and have gradually evolved away from their roots. The bulk of the population, however, continues to be POOR, illiterate, ignorant Wahabi fundamentalists. This means that a century after Ibn Saud created a kingdom out of a bunch of little warring states, his aged sons are trying to rule a populace that neither understands nor approves of their lifestyles and sees them as corrupt tools of infidels. Organizations like Isis and Al Quaeda don't exist merely to launch guerilla attacks on the U.S. They are part of an internal power struggle inside Saudi Arabia, one that the Sauds cannot win in the long run because they've spent the last half-century living high on their oil profits instead of using them to bring their people (not just a few key urban locations) into the modern era.
In the meantime, the Saudis are at war for their very survival, with rebel factions that are using proxies in the immediate neighborhood to encircle the Mother Country, collect resources, and drain the Saudis dry with constant warfare. And before it ends, they will beg the U.S. to step in and kill their own surplus population, which is something we need to think REAL hard about now, before it happens. But right now, they HAVE to pump at full capacity, because they need the cash to fight a war we barely acknowledge as existing.
the shit in Saudi Arabia wont bode well.. they have started to reminish French kings before the French Revolution, although there is occasionally one who donates extreme amounts of money to the poor as a religious duty and by doing so releases some steam.
+ 1 for a lucid comment
Excellent.
700 billion in reserves will not hold the House of Saud for long at the current burn rate.
I've been thinking for awhile they could be the biggest kingpin to fall to the Feds Folly. And all these devaluations, Revolutions - AND WARS - were born in the Eccles Bldg on the alter of USSA political expediency.
If any of their reserves are in gold held in US or London, then....it's gone.
i wud have bought vix.. oh.
Any country with $ reserves is at risk. The biggest domino is sliding away fast morally, politically and economically.
Global Markets require the anchors of only few major currencies - the $, RMB and Euro. Their status are not fixed but detemined by the shifting wilingness of the Elites to use them as weapons for wealth preservation/enhancements. (Sorry if you think that the 90% who commands 10% of the wealth has any influence). All other currencies are vanities of the various Tribes. Proof lies in a mere 2 to 3% fix by China's PBOC that has caused such havoc and wreackage. The contagion lies in the pipeline connecting the global economy.
Little People are enticed to dance with flames and should be looking for their stores of value elsewhere (eg survival farms). The further you move away from the vortex, the more you are shelterd from the flying sharpnels. Does it really take so much not to see where the center is ? It is all papers that have been touched by the Predators and pushed by their Peddlers.
Favourite line: "allow the dong to swing..."
The US Dollar has a high value because it is quite normal to switch your local currency savings to US dollars when you think there is financial turmoil in your own country.
Maybe someone should tell them about gold.
Fiat may come in many colors but it is still fiat
I see these more as overdue corrections. FX traders will get burned but they should have had more sense.
Gosh, I still hold $ 100 worth in Zambian Kwatcha. Anyone interested in a currency swap?
Time to impeach all 535 morons + I Criminal-in-Charge for fraud, treason