Intervention May Be Way Forward for Emerging-Market Currencies

(Bloomberg) -- A bumpier outlook for emerging-market currencies may push more central banks to unleash their firepower.

“There is going to be intervention,” said Peter Cecchini, the New York-based chief global markets strategist at Cantor Fitzgerald. “The Brazilian central bank, the Indonesian central bank, they are all going to intervene either by raising rates or by intervening directly in the currency markets.”

That’s already been the case in Argentina, which spent $5 billion in six days -- or about 10 percent of its foreign reserves -- in an effort to prop up its peso, and then resorted to a series of dramatic interest-rate hikes. President Mauricio Macri’s team is now negotiating with the International Monetary Fund for a credit line of about $30 billion.

While Cecchini doesn’t expect a worst-case scenario in which U.S. Treasuries spike and emerging-market currencies plunge, he remains cautious. Ultimately, he says, all reserves are limited and a depreciation can only be halted by rate hikes. Even Brazil, which is widely expected to cut rates again next week, can tighten beforehand, he said. The real fell almost 5 percent during the past month, leading the central bank to intervene in futures markets.

Investors should be worried by the depreciation, said Tony Volpon, a former Brazil central bank deputy governor who is now the chief economist at UBS Brasil CCTVM SA. While the scenario doesn’t yet call for panic, he says authorities should intervene like they did back in 2013, when its dabbling in currency swap markets became so regular that traders started likening them to "ração diária," the moment each day set aside to feed your pets.

“The central bank should be more aggressive in offering protection to the market,” he said an event in Sao Paulo on Tuesday. "They are sitting on over $380 billion. After global financial conditions tighten, it will be too late to help."

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