Intervention From Rupee to Real Shows Focus on Inflation
Just three months ago, emerging nations from the Philippines to Brazil were intervening in foreign exchange markets to make exports more competitive. Now they are selling dollars to stem currency declines and quell inflation.
Bank Indonesia said on May 29 it will start offering dollar term deposits in two weeks to stabilize the rupiah, the second- worst performer in Asia this year, as a report this week may show consumer prices rose the most in nine months. Brazil auctioned currency swaps for four straight days last week to support the real after it fell to a three-year low. South Korea, India and Russia are also acting to curb exchange-rate losses.
“Inflation is still an issue for a number of emerging- market countries,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “At the same time, growth is an increasing concern for those countries vulnerable to the European debt crisis. Policy makers have to try and strike a very careful balance.”
Asia, whose 10 biggest economies hold half of the world’s $10 trillion reserves, has had the most success in curbing currency declines, with the Taiwan dollar down 2.1 percent this month, the Philippine peso 3.3 percent and the Thai baht 3.6 percent. The Polish zloty and the Hungarian forint both slid 11 percent, the two biggest losers, as the countries sought to stem losses without depleting currency stockpiles, amid a worsening European debt crisis and fund outflows.
Emerging-market stock funds had a net $1.5 billion in redemptions for the five-day period ended May 23, a third week of outflows, according to EPFR Global, a data provider in Cambridge, Massachusetts. Bond funds focused on developing countries recorded $478 million of withdrawals. JPMorgan Chase & Co’s Emerging Market Bond Index has dropped 2.6 percent this month, while the MSCI (MXEF) Emerging Markets Index of shares plunged 13 percent.
The average cost of insuring developing Asia’s sovereign debt for five years using credit-default swaps rose 53 basis points, or 0.53 percentage point, from 2012’s low in March to 181 yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. A similar measure for Latin America advanced 161 basis points to 415, and for emerging Europe rose 163 to 448.
“Risk-off sentiment has been lingering for quite some time,” said Takahide Irimura, the head of emerging-market research at Kokusai Asset Management Co. in Tokyo, which oversees $46 billion. “It’s understandable that central banks around the world come up with different types of measures to supplement their intervention to stem declines.”
Russia’s central bank sold dollars to slow the ruble’s depreciation for the first time since January on May 25, according to a statement on its website. The bank is selling as much as $150 million a day after the ruble depreciated beyond 35.65 against its dollar-euro basket, according to Vladimir Kolychev, chief economist at Societe Generale SA’s OAO Rosbank unit in Moscow.
Poland’s government plans to sell the equivalent of 11 billion euros ($13.6 billion) of foreign currencies in the market this year to support the zloty, about the same amount as in 2011, Deputy Finance Minister Dominik Radziwill said May 23. Hungary’s central bank held the European Union’s highest benchmark rate at 7 percent on May 29, saying a “cautious policy stance” was needed because of the outlook for inflation.
Turkey’s central bank said on May 29 it will raise the portion of required reserves lenders can keep in foreign currency to as much as 45 percent from 40 percent. The measure, effective June 22, would free up to 2.8 billion liras ($1.5 billion) of cash, according to a statement on its website.
“There is a limitation on how far we can use the reserve to defend our currency,” Bank of Thailand Governor Prasarn Trairatvorakul told reporters in Bangkok yesterday. “This method has a dangerous aspect. If we use it to a certain point, we may be cornered when our reserves run out.”
Bank Indonesia will use its “ammunition” carefully, Deputy Governor Hartadi Sarwono said on May 16 in Jakarta. A weekly offering of dollar deposits will “complement” reserves, according to the monetary authority. The rupiah fell 5.3 percent this year and dropped to 9,620 per dollar yesterday, the weakest level since November 2009.
The Reserve Bank of India curbed trading in rupee derivatives this month to rein in volatility, and cut the amount of export income that can be held in foreign currency to 50 percent from 100 percent. The rupee lost 5.7 percent in 2012 in the worst loss among Asia’s 10 most-used exchange rates, and touched a record low of 56.5150 per dollar today.
“Central banks are intervening in order to prevent any perception of disorderly currency devaluation and to maintain greater stability in domestic markets,” said Sacha Tihanyi, a senior Hong Kong-based strategist at Scotiabank, a unit of Bank of Nova Scotia. “This helps prevent a vicious circle of foreign investors selling domestic securities and exiting the currency, potentially drawing in more selling.”
Brazil’s real fell to a three-year low this month, prompting the central bank to auction currency swaps in the first operation of its kind since October to limit declines. The central bank has lowered the benchmark Selic rate 400 basis points since August to 8.5 percent to buttress economic growth. In announcing its latest reduction yesterday, the central bank said that “risks to the inflation trajectory are limited,” and cited the fragility of the global economy for its decision.
Reversal in Brazil
Brazil’s swap auctions aimed at bolstering the real were a reversal from April’s policy of stepped-up dollar purchases to weaken the currency to aid exporters. Policy makers bought $7.2 billion in the spot market in April, the most since $8.4 billion in March 2011.
Policy makers were concerned with excess volatility, not any particular exchange rate level, after the real suffered from an “aversion to risk,” Carlos Hamilton, the Brazilian central bank’s director of economic policy, said last week.
Mexico’s central bank sold dollars on May 23 for the first time since 2009 to prop up the peso after it plunged to a six- month low. Peru sold U.S. currency on May 25 for the first time in seven months, dipping into a record $58 billion of international reserves.
Emerging economies are trying to contain inflation after their faster growth relative to developed economies lured money that policy makers in Europe and the U.S. pumped into their financial systems. Developing nations will expand 5.7 percent this year, compared with 1.4 percent for advanced countries, according to the International Monetary Fund.
“Inflation will show up eventually with all this monetary printing,” John Corcoran, a New York-based client portfolio manager at OppenheimerFunds Inc., which oversees more than $183 billion in assets, said in an interview on May 30. The effects of intervention “will be a mixed bag,” he said. “One lesson from the 1998 Asian crisis is that market forces typically overwhelm the ability of any one central bank to control how the market treats its currency.”
Brazilian investors’ inflation expectations, while falling, remain above the country’s 4.5 percent annual target.
The gap between fixed-rate and inflation-linked government bonds due 2015, known as the breakeven rate, was 5.18 percentage points in Brazil yesterday, compared with 1.69 percentage points in the U.S. and 0.92 percentage points in Germany. Brazil’s inflation rate fell to 5.1 percent in April from 5.2 percent in March.
Authorities in Asia’s emerging economies must guard against price risks and be prepared to reverse policy easing even as growth slows, the World Bank said this month. Central banks from Indonesia to South Korea to Malaysia refrained from cutting borrowing costs this quarter.
“Inflation is certainly more of an issue in Asia than it is in the West,” said Simon Grose-Hodge, head of investment advisory at LGT Bank in Singapore. “Asian central banks will prefer to address it through discreet intervention rather than raise interest rates, which is more detrimental to growth.”
Indonesia’s annual consumer-price gains quickened to 4.6 percent in May, the most since August, economists estimate before data due on June 1. Taiwan’s statistics bureau said this month inflation may be at 1.84 percent in 2012, compared with its January forecast of 1.29 percent.
“We have many strategies to handle inflation, including working together with the government,” Difi Johansyah, Bank Indonesia’s Jakarta-based spokesman, said yesterday, without elaborating.
A slide in the won is making imports costlier and spurring inflation in South Korea, Finance Minister Bahk Jae Wan said on May 18. The Philippine central bank will curb excessive currency movements if needed, Governor Amando Tetangco said on May 25, as the peso slumped to a four-month low. Malaysia’s central bank declined to comment on any plans to support the currency to cap prices.
“These interventions are reactive and not proactive,” said Stephen Jen, managing partner at SLJ Macro Partners LLP in London and former head of currency research at Morgan Stanley. “The fear here is that, given the massive amounts of capital that have entered these countries in recent years, a stampede on their currencies could easily be triggered, if they are not careful.”
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