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Central banks in emerging markets are doing everything they can to maintain the value of their currencies, with the Turkish Central Bank announcing a record maximum $1.35 billion dollar auction today, according to WSJ.The Turkish Central Bank — like those of Russia, Brazil, Poland, Malaysia and the Philippines — is intervening to prevent its currency’s value from sliding as investors flee bets in emerging markets amid economic uncertainty.
Nomura even decided that Brazil was the “loser” in that war, after failing to properly hold back the real’s appreciation.
Now that situation has completely turned around.
While positive for export growth, excessive and sudden currency depreciation threatens imports, purchasing power, and price stability. These economies are now doing whatever they can to maintain the value of their cash.
But keeping the economy strong in the EM has been a tricky game to play.
Bloomberg reports that Turkey and Brazil became the only two G-20 economies to cut rates in the past two months in order to shore up growth, despite increasing the probability of inflation.
Today’s Turkish currency intervention was prompted by nearly a 20% drop in the currency’s value this year. Dow Jones reports that we could see an even bigger dollar auction tomorrow.
While the sale shored up the value of the lira immediately, doubts remain about the success of interventions by Turkey and other EM central banks.
“This could still end in tears,” said Timothy Ash, an emerging markets strategist at Royal Bank of Scotland told WSJ. “The CBRT(Central Bank of the Republic of Turkey) is clearly mindful of the fact that it has pretty limited foreign exchange reserve cover, i.e. USD85 billion, or around 42% coverage of annual external financing needs (normally 100% is seen as prudent) with import cover of only around 4 months (3 months usually deemed to be the minimum).”
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