According to Bloomberg News, if the EM central banks were facing a tough time keeping up their currencies from dropping, as the Federal Reserve geared up to scale back on its monetary stimulus, their task seems to be harder now.
As soon as news about omicron broke, which is another variant of Covid-19, the risk assets were sent into a tailspin Friday, causing MSCI Inc’s gauge of developing world currencies to fall into a deficit level for the year and on track potentially for the first yearly drop in 3 years.
The central banks in developing nations are being made feeble since the dollar has assumed a renewed vigor even before omicron was identified or spotted. With the policy tightening right from South Korea to Russia as well as Brazil, which is doing very little to stem the currency losses, which in turn is leading to inflation. The biggest suffered was Mexico’s Peso, Hungary’s forint, and South Africa’s rand, and all currencies from those countries that have increased the rates of interest this month (November). That has put bearish investors on the rise.
As per Viktor Szabo who is working as an investment manager, abrdn plc, London, “Any factors which limit visibility makes life more difficult for central banks”. Inflation is high even if it is caused by supply-side shocks. The rise of omicron which is a more serious variant could also give a push to the mature market policymakers as the European Central Bank and Fed., which could in turn strike a balance to counter the aggressive tightening in the developing countries.
Bloomberg News also states that this new variant, is quite likely might affect emerging markets much harder than the assets, especially in the higher beta currency markets like Latin America and South Asia, which are vulnerable to risk sentiment and get exposure to tourism and energy sectors that are affected by the pandemic.
Punished by the Markets
Political interference has not helped. Recep Tayyip Erdogan, the Turkish President’s campaign for dropping rates has resulted in the lira spiral down into freefall the last week. The Mexican Peso dropped as President Andres Manuel Lopez Obrador nominated a finance official in the ministry that led to fears and concern that the government might interfere in the independence of the Central Bank.
The correlation between the currencies of the emerging markets to that of the short-term Treasuries is almost near to the strongest level recorded since 2014, thereby underscoring the probable fallout from the higher rates of interest. Bloomberg News reports that the investors have been hedging against the wide price swings as the dollar was seen climbing to the highest since July 2020. JPMorgan Chase and Co’s prediction indicated volatility in developing currencies increased last week by 10% since April, the first time.
The real rates that remove inflation in most of the developing nations continue to be below zero, despite the tightening of policies. And this is what is dimming the emerging market asset appeals as United States yields rise and the concern of how fast there might be a recovery in the developing countries.
