Emerging Market Dominoes to Fall as SocGen Sees Rout
The worst month in a year for emerging-market currencies will prove to be more than a momentary bout of weakness to strategists at firms from UBS AG to Societe Generale SA who see the Federal Reserve weaning investors off its extraordinary stimulus.
South Africa’s rand led declines among the 24 developing-nation currencies tracked by Bloomberg last month, tumbling 11.3 percent. JPMorgan Chase & Co.’s Emerging Markets Currency Index fell 3.3 percent, the most since it slipped 7 percent in May 2012. Only China’s yuan gained, rising 0.51 percent.
“For these emerging-market currencies, this is the beginning of a trend that perhaps is going to be longer and deeper in terms of a correction,” Tom Levinson, a currency strategist in London at ING Groep NV, the largest Dutch financial-services firm, said in a May 31 phone interview.
No other currencies benefited more from at least $2.5 trillion of cash that the U.S. central bank pumped into the financial system to pull the economy out of a recession. Now that Fed Chairman Ben S. Bernanke has signaled the central bank could start pulling back if it sees sustained economic improvement, investors are backing away from developing nations, especially those with higher deficits and weaker growth.
The rand’s decline was its biggest in almost two years, as government reports showed the economy grew at the slowest pace since its 2009 recession and the trade gap widened last quarter. A wage dispute at South Africa’s mines and lower commodity prices are also weighing on the rand, which fell to a more than four-year low of 10.2847 per dollar on May 31, before climbing today for the first time in over a week.
“The bull market is over” for developing-nation currencies, said Kit Juckes, a strategist at SocGen in London. The rand is “the first of what I suspect will be a series of dominoes to fall,” he said.
Turkey’s lira extended last month’s 4.6 percent decline against the dollar as protesters took to the streets calling for Prime Minister Recep Tayyip Erdogan to resign. It fell to a 17-month low of 1.9010 today, within 1.1 percent of its record low at the end of 2011, and was down 0.3 percent at 1.8818 as of 3:13 p.m. in New York.
As well as the lira and the rand, Juckes identified Mexico’s peso and the Thai baht as currencies that will continue to weaken. “The lessons of the past are that sell-offs triggered by global policy tightening are pretty indiscriminate,” he wrote in a May 31 client note.
The lira was also hurt by a May 31 government report that showed that Turkey’s trade deficit widened more than forecast to $10.3 billion in April.
“The market has taken it very badly because when you have a widening of your trade deficit in a context where investors are exiting local markets,” then “how are you going to finance that?” Murat Toprak, the London-based head of European, Middle East and Africa currency strategy at HSBC Holdings Plc, said in a phone interview that day.
Turkey’s central bank cut its benchmark interest rate in the past two months to weaken the currency and make exports more competitive.
The lira may climb to 1.8 per dollar by year-end, according to the median estimate of 22 analysts surveyed by Bloomberg. HSBC is more pessimistic, predicting 1.85 by the end of 2013.
South Africa’s rand gained 2.6 percent to 9.8329 per dollar today, paring its loss this year to 13.8 percent. Gold lost 6 percent last month and platinum slid 3.2 percent.
Last month’s slump wiped out half of the 30 percent surge for emerging-market currencies since 2009, after U.S. policy makers introduced quantitative easing, or QE, in response to the worst financial crisis since the Great Depression, JPMorgan’s index shows.
The gauge dropped the most in seven months on May 23, plunging 0.75 percent. That was a day after Bernanke’s comments to lawmakers on the outlook for stimulus accelerated a rout in developing-nation assets.
“Bernanke is saying that it’s not going to happen in a rush but at least the debate is beginning,” Bhanu Baweja, the London-based global head of emerging-market fixed-income and foreign-exchange at UBS, said in a May 30 phone interview. “It’s a very big deal.”
Yields on local-currency bonds of emerging nations surged to a seven-month high of 5.76 percent, from 5.34 percent before Bernanke spoke, the JPMorgan GBI-EM Global Diversified Composite Yield to Maturity Index shows.
The yuan was the only emerging-market currency to strengthen last month, rising to 6.1345 per dollar. It will climb to 6.1 by the end of this year, the median estimate of 31 analyst estimates compiled by Bloomberg shows.
China’s slowing economy, the world’s largest after the U.S., is also weighing on developing-nation currencies.
The International Monetary Fund lowered its growth forecast for China last week, saying the economy will grow about 7.75 percent this year and next. That’s down from earlier projections of 8 percent for 2013 and 8.2 percent in 2014.
Brazil’s real had the second-biggest decline among emerging-market currencies last month, dropping 6.4 percent against the dollar.
India’s rupee was the worst-performing Asian emerging-market currency last month with a 5 percent decline, followed by the Thai baht, which fell 3.9 percent. The rupee dropped to as low as 56.83 today, its lowest level in almost a year. Analysts expect a gain to 53.36 by the end of 2013, according to the median of 25 estimates compiled by Bloomberg.
Speculation the Fed will pull back QE is pushing up yields on U.S. Treasuries, reducing the advantage of emerging-market securities and demand for the currencies needed to buy them.
“This is where the dollar starts to rally potentially for the right reasons because the U.S. business cycle is further developed,” said Levinson at ING.
IntercontinentalExchange Inc.’s U.S. Dollar Index, which measures the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, jumped 2 percent in May. The yield on the benchmark 10-year Treasury (USGG10YR) surged half a percentage point in May to 2.13 percent.
“Emerging-market currencies will remain under severe pressure for at least three months,” Benoit Anne, SocGen’s head of emerging-market strategy in London, said by e-mail on May 31. “It will take time for the fundamentals to improve and then we also need the U.S. Treasury correction to stabilize.”
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