- Asian markets are relatively quiet, but multiple emerging market currencies are still under pressure.
- It follows a bout of volatility in mid-August, when the collapse of the Turkish lira sparked contagion fears.
- The latest price moves are a reminder that further volatility could be in store as amid the global withdrawal of US dollar liquidity.
It’s been a relatively calm week on global markets as US stocks climb to new record highs amid strong earnings and optimism on NAFTA trade deals.
But while volatility has been few and far between, the price-action in emerging markets (EM) suggests risks are still evident.
Overnight selloffs in EM currencies have continued during Asian trade, with the Turkish lira, Argentinian peso and Indian rupee all under pressure.
And markets will have one eye on the lira’s latest fall, after a mid-August plunge amid tensions with the US which in turn sparked global contagion fears.
This week’s decline appears to have been driven by a decision from ratings agency Moody’s to downgrade 20 Turkish banks, citing risks around market funding.
The lira immediately fell below 6.3 per US dollar and has lost another 1.5% in Asian trade:
Research from Capital Economics suggests Turkey’s economy has now fallen into a steep recession.
In addition, the Argentinian peso slumped by more than 7% overnight as markets lost faith that the government will be able to meet its refinancing obligations on outstanding debt.
The latest run on the currency comes amid reports the International Monetary Fund is assessing a request from Argentina to speed up the approval of a $US50 billion emergency loan.
“The Argentinian peso suffered the largest drop since December 2015 yesterday,” said Ilya Spivak, senior strategist at IG Markets.
“That has brought the vulnerability of many emerging market economies to the Fed-driven rise in global borrowing costs (rate hikes, quantitative tightening) back into the spotlight,” he told BI.
Also overnight, the Indian rupee fell to a new all-time low of more than 70 rupees per US dollar and has been unable to make up ground in Asian trade.
Currency strategists from ANZ said downside risks to the rupee remain, with India’s trade deficit expected to widen while the country faces a withdrawal of capital.
“India’s July trade deficit worsened to $US18 billion, the highest since May 2013,” ANZ said, partly as a result of higher oil prices.
“Portfolio outflows of $US6.4 billion this year have added to rupee weakness. Given further US Fed interest rate hikes and investor caution towards emerging markets, portfolio flows to India are likely to remain fickle.”
Pressure on emerging markets has been evident since the US dollar commenced its recent uptrend in April.
As the world’s most liquid reserve currency, many emerging markets raise debt in USD, which can create problems when the greenback begins to strengthen.
Back in June, Reserve Bank of India governor Urjit Patel wrote in the FT that the continued withdrawal of USD liquidity would create an “inevitable crisis” in dollar-denominated bond markets.
The second reading of US Q2 GDP beat estimates overnight and the Federal Reserve remains on track to hike rates again in September.
Today’s price action is evidence that further cracks in emerging markets could give rise to more bouts of volatility in the second half of the year.
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