September or December Is Near-Irrelevant for Fragile Currencies

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Whether the Federal Reserve raises interest rates in September or December is turning out to be almost irrelevant for emerging-market currencies and those from nations that export minerals to China.

Rather than being dominated by prospects for U.S. policy, they’re falling as commodity prices tumble for a seventh week. South Africa’s rand dropped to a 13 1/2-year low against the dollar, even after minutes of the Fed’s July meeting prompted traders to pare bets on a rate increase next month. Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate.

“The moves in EM are getting pretty wild,” said Peter Rosenstreich, chief market strategist at Swissquote Bank SA in Gland, Switzerland. “There’s probably not a big difference between September and December -- it would psychologically change the game if they pushed it out to 2016.”

Pressure is most intense on countries with managed exchange rates, which are finding it increasingly difficult to stop their currencies from weakening, particularly after China devalued the yuan last week. Ukraine is under pressure to remove capital controls on the hryvnia, while Nigeria is losing the battle to prevent the naira from going the way of other oil-dependent currencies.

13 Rand

The rand slipped 0.6 percent to 12.9697 per dollar as of 7:19 a.m. New York time, after weakening through 13 for the first time since 2001. The Aussie dropped 0.5 percent, the most in more than a week, to 73.09 U.S. cents.

The euro climbed 0.5 percent to $1.1174, adding to Wednesday’s 0.9 percent gain, while the yen slipped 0.2 percent to 123.99 per dollar. It reached a 13-year low of 125.86 on June 5.

Traders reduced odds on a September rate increase by the Fed to less than 40 percent. That’s still up from 21 percent after the July 8 release of the June meeting’s minutes. That’s when policy makers expressed concern about weak consumer spending and risks from China and Greece. Futures show a 65 percent chance that officials will act in December.

Minutes of its last policy meeting published Wednesday showed most officials didn’t consider that the conditions for the first rate increase in nine years had been reached. Still, participants said conditions “were approaching that point” where the world’s largest economy could sustain a slight increase in official borrowing costs.

Emerging-market currencies around the world are meanwhile plunging in line with commodities. Kazakhstan, central Asia’s biggest crude exporter, moved to a free float on Thursday, a day after Vietnam marked down the dong for the third time this year.

“The more dovish than expected FOMC minutes have offered little to no relief for most emerging-market currencies,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a client note. “Even a gradual pace of Fed tightening would appear relatively hawkish in contrast to increasingly negative developments overseas.”

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