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THE renewed plunge of the Indonesian rupiah, which hit a 20-year low, and Indian rupee, the worst performing major currency in Asia, puts emerging market (EM) currencies ever more in the spotlight.
Against the persistent dollar strength, EM currencies are under pressure again; last Thursday, the MSCI EM FX index hit its worst day since the Turkish lira sank to a new record low in August.
Having lost almost 40% of its value against the dollar this year, the lira is further pressured by soaring inflation which rose to 24.2% in September, or 6.3% from a year before.
The continuous rise in oil prices had caused the rupee, which is down 17% in absolute terms since January, to crash to an all-time low of 73.77 against the dollar last Thursday; it briefly hit 74 to the dollar the next day after the central bank surprisingly left rates unchanged.
EM currencies, even those with stronger fundamentals, may drop further; economies with current account (CA) deficits, such as Indonesia and India, will be among the first to be targeted by currency markets.
Stronger EM currencies have also fallen. The South Korean won was near a three-week low last Thursday while the offshore yuan, which does not come under China’s official trading band, was near its weakest level since August.
China’s CA balance is on watch; in the first quarter this year, it suffered its first CA deficit of US$28.2bil in 17 years while its CA surplus for the second quarter had narrowed sharply to US$5.3bil compared with US$52.6bil a year ago.
South Korea’s CA surplus had hit a six-year low of US$29.65bil for the first half, down 16.8% from the same period last year.
Exports from South Korea fell 8.2% year-on-year in September against an estimate of 5.5%.
“Countries with CA deficits should proactively raise rates by more than the Fed’s rate hike,” said Pong Teng Siew, head of research, Inter-Pacific Securities.
Emerging economies have their individual strategies; the Reserve Bank of India, after two rate hikes since June, left rates unchanged on risks that it sees from global tightening, trade wars and high oil prices.
Economic growth for India in 2018 is still forecast at 7.4%.
In contrast, Indonesia and the Philippines have gone ahead with aggressive actions to try and stabilise their currencies.
Indonesia, whose current account deficit in the second quarter rose to a four-year high at US$8.03bil, has raised rates five times since May; the Philippines, dubbed the inflation king of Asia, four times with more to come.
Bank Indonesia said selling pressure on the rupiah may ease next year.
Of some concern is that unlike the previous round, currencies without issues relating to weak fundamentals are also being dragged lower, noted Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.
Overall, EM currencies are feeling the heat from the rising dollar on the Fed’s affirmation to stick to its rate hike path, even as the markets expects a slowdown from next year.
Against the weakening of some hard US economic data, would the market prove to be correct?
The US housing market, which is hit by rising borrowing costs, is flashing a warning sign, said CNBC; the leading home price index compiled by the Economic Cycle Research Institute turned negative last April while the S&P Case-Shiller home price index is decelerating.
US retail sales in August registered their smallest gain, of 0.1%, in six months; orders placed with US factories for business equipment unexpectedly fell in August, the first time in five months.
US manufacturing output rose 0.2% in August, on a 4% rise for motor vehicles and parts; excluding this gain, factory output was unchanged.
That the Fed rate hikes may go past the neutral level, which is seen near 3%, is further pressuring EM currencies.
With the current Fed benchmark rate at 2.0 to 2.25%, projections are for rates to hit 3.4% before pausing.
The surge in long term US bond yields, spurred by huge borrowings from the federal government and rate tightening, is choking off flows from riskier EM debt that gave higher returns.
The MSCI EM stocks index may have recorded its biggest weekly loss in eight months; strategists and investors from JP Morgan, UBS Group and Morgan Stanley see opportunities against warnings from Goldman Sachs Group and Allianz SE.
JP Morgan’s cross-asset strategy has shifted from full weighting in the United States for the first half, to equal weightings for stocks in developing bourses and the United States.
Columnist Yap Leng Kuen sees challenges in stock picks amid a myriad of worries.