Earlier this week, Kazakhstan moved to a free float [17] 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:
[18]
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 [19] 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 [20] 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 [21] and here [22]), 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.
[23]
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.
[24]
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 [25].
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.
[26]
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 [27]," last November.
