Emerging-Market Central Banks Are Losing Battle Against Traders
(Bloomberg) -- Central banks in emerging economies are losing the battle with markets as their efforts to shield their currencies struggle for traction, suggesting policy makers have more work to do.
Rising U.S. interest rates, the strong dollar, higher oil prices, China’s market and economic wobbles and fears of a global trade war are conspiring to pressure emerging-market currencies. Here’s a look at how markets have responded to recent central bank moves:
Bank Indonesia decided on Friday to proceed with a third increase in six weeks with a more-than-expected 50 basis points. They had delivered two rate hikes in a fortnight in May, but the currency has come under pressure amid the escalating U.S. and China trade row, falling to the weakest since October 2015.
The Philippine peso has hit its weakest level against the dollar in 12 years, even after the central bank raised the policy rate for the second consecutive meeting to 3.5 percent. Analysts are saying more increases are needed to support the beleaguered currency as the central bank forecasts inflation this year to reach 4.5 percent.
The Indian rupee slumped to an all-time low on Thursday as a resurgence in crude oil prices and the emerging market selloff took a toll on the currency. The nation imports about three quarters of its oil, threatening inflation and worsening the trade deficit.
Malaysia’s ringgit declined after Bank Negara boosted the policy rate on Jan. 25 for the first time since 2014. In recent months, the ringgit has racked up losses amid uncertainty over the policies of the new government.
The Turkish central bank raised interest rates by 500 basis points since April to help stabilize the lira, which has shed almost a fifth of its value against the dollar as it plunged to successive record lows. The lira is particularly exposed to the prospect of rising U.S. rates given the economy’s large current-account deficit and external financing needs.
Pressure is rising on Brazil’s central bank to raise rates after the real weakened more than 10 percent this year and a nationwide trucker strike caused shortages and higher prices of food and fuels. For now, policy makers are preventing additional depreciation by offering hedge against currency losses. At the same time, they backed off from a previous pledge to keep rates unchanged at the current all-time low of 6.5 percent.
Mexico’s central bank increased rates last week. The bank may extend its monetary tightening cycle in the near future as it confronts a number of risks to inflation, including political uncertainty related to the upcoming presidential election, concerns about the future of the North America Free Trade Agreement, and growing emerging-market turbulence.
Argentina’s central bank raised its benchmark rate to 40 percent early in May to support the currency amid the emerging-market rout. The aggressive monetary tightening -- totaling 1,275 basis points after three surprise moves in just one week -- has been insufficient to stem the peso’s decline, even after the government announced talks with the International Monetary Fund for a record $50 billion credit line.
China’s currency has fallen more than 3 percent against the dollar since the middle of the month as a raft of economic data came in below expectations. Selling deepened along with President Donald Trump’s threat to keep escalating tariff hikes until a potential $450 billion of Chinese shipments are targeted.
©2018 Bloomberg L.P.