A “dark gray” Monday for emerging market currencies

There is a gloom pervading global markets.  The gloom of the oil producers is not being offset by an optimism among the oil consumers. The Russians are feeling the effects of the sanctions. Chinese and Indian industrial growth – by their standards – are stagnant. Europe is stuck with its high energy price models and is not prepared – yet – to understand that price reductions by cost reductions (in real terms) is a good thing. The political leadership of the G8 or even the G20 are not – individually or jointly – communicating any convincing vision of a global economy and its recovery. The Middle East is in chaos and nobody has any clear notion of how order can be restored.

It was a dark grey – if not a completely black – Monday for emerging market currencies yesterday. The Indian Rupee slumped to a 13 month low. The Indonesian Rupiah hit a 16 year low. The Russian Ruble, Turkish Lira, Brazilian Real and South African Rand all hit new lows. There was no obvious single trigger but largely driven by sentiment and general gloom. The emerging markets are overly concerned about potential rate hikes in the US next year. But the real conflict lies in the mismatch between Japan and Europe planning rate cuts while the US plans rate hikes. A soaring Dollar is all very well and is fine for a while but it reduces the possibility of everybody else buying goods priced in Dollars.

One wonders why the G8 or the G20 counties bother with their summit meetings. Either the meetings are a particularly ineffective forum or the people attending are largely incompetent. I tend to think that without one or more showing real leadership, the G8 and G20 are just talking-shops and “whatever will be, will be”.

To get a turn-around and move upwards during a period of decline, it is necessary first to hit bottom. It seems to me that the bottom is near – unless we are again approaching a chasm where the bottom is not even visible.

Wall Street Journal:

Analysts say there was no specific catalyst for the selloff, but a number of factors converged to put downward pressure on emerging markets. Global oil prices continued to tumble, exacerbating problems for oil-exporting countries like Russia and Colombia. The Federal Reserve is also scheduled to issue a statement on Wednesday, which could signal that the central bank is closer to raising interest rates. That would deliver a blow to emerging markets that have benefited from years of easy money from the Fed. 

As investors scrambled to dump their risky assets, the selloff in emerging markets spread beyond oil exporters into countries like India and Indonesia, which had been relatively resilient in recent weeks.

“There’s just a lot going on in emerging markets, and investors are having some difficulty absorbing that information and figuring out what will happen next,” said Lucas Turton, chief investment officer of Windham Capital Management LLC in Boston, which manages $1.8 billion and cut back on its exposure to emerging-market stocks two months ago.

In afternoon trading in New York, the dollar was up 3.1% against the lira, with the Turkish currency trading at 2.3706 to the greenback. The real was off more than 1% at 2.6884 to the dollar, while the ruble plunged by more than 10% to trade recently at 65.615 to the dollar. ……

….. The Fed is expected to raise interest rates next year as the economy improves, while central banks in Europe and Japan are pursuing strategies to stimulate growth and inflation. This divergence has caused the dollar to soar against currencies around the world in recent months. ….

Many investors are bracing for turmoil in emerging markets as the dollar strengthens, making it more expensive for these countries to pay back international debt, and as U.S. growth beats much of the rest of the world. For instance, Indonesian companies have issued $11.4 billion of foreign-currency debt so far this year, according to Dealogic, putting them at risk for what analysts call a “currency mismatch.” This means these companies could struggle to pay off their dollar debts as their local currency, the rupiah, weakens in value against the greenback.

The WSJ ends on a very pessimistic note.

Stephen Jen, founding partner of hedge fund SLJ Macro Partners, said emerging-market currencies could “melt down” as investors accelerate their selling.

“Nothing the [emerging market] economies can do will stop these potential outflows, as long as the U.S. economy recovers,” Mr. Jen said.

My simplistic view is that market sentiment – gloom or optimism – is the most critical factor. And, I believe, that sentiment is a direct consequence of perceived vision and leadership. Obama has demonstrated that he is something of an analyst but he is no leader. Europe has no leader (apart from a reluctant Merkel) who communicates any clear vision of Europe or the world. In the absence of political leadership I am looking to industry and industry leaders – who I know exist – to provide the resilience to hold the fort and keep going till political leadership appears again.

The political leadership I am looking for is that person or persons who can provide vision and some real leadership for the G8 or the G20 groupings. No doubt it will come, but it could take some time. It has to, I think, come from the US or Europe. It is possible but unlikely to come from China or India or S. America for some time. Jeb Bush or Hilary Clinton or Elizabeth Warren are unlikely to provide such leadership. It could come from an unlikely source in Europe.

“Cometh the hour, cometh the person”, one hopes.

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