Emerging markets exchange rates are coming under increasing pressure. This is due to rising American interest rates and a growing nervousness on the financial markets. This is according to Laurens Maartens of the Dutch financial institute, Nederlandsche Betaal- en Wisselmaatschappij.
The American Dollar recovered in recent weeks from the blows it received at the end of 2016. For the first time since the beginning of the year, you can get just less the $1,20 for a euro. This recovery is mainly felt in developing countries. In two weeks, several of the currencies in these countries fell by more than 3% against the Dollar. This stirs up unpleasant memories of May, five years ago.
Investor unrest
On 21 May 2013, former Fed chairman, Ben Bernanke, alluded to the gradual reduction of a major American economic stimulus programme. The prospect of a more conservative rate at the US central bank caused considerable unrest among investors. They withdrew massive amounts of money from the bond market. This was out of fear of a rise in the interest rate. As a result, the return on American government bonds shot up almost 1,5% to nearly 3%. This interest rate hike put an end to a popular game for international investors: carry trade. Here, money in borrowed at a low rate in the US. It is then lent to emerging countries at a significantly higher interest rate.
Not a rerun of 2013
American long-term interest rates have now climbed even higher than in 2013. This time the interest rate hike is being caused by investors who are anticipating an increased US budget deficit. They are not frantically pulling their money out government bonds. The first stage of the climb in interest rates has not been at the expense of developing markets. Since 2013, many of these countries have built up much bigger currency reserves. They also now have healthy running economies. American short-term interest rates are also still relatively low. There has been no reason for investors, in search of an attractive return, to turn their backs on these emerging markets.
Tip of the iceberg
In the US, inflation has, however, climbed from 1,6% in June to 2,5% last month. This opens the way for the Federal Reserve to raise interest rates faster. There is also increased tension on the financial markets. When investors want to reduce risks, there is usually an exodus from developing markets. They move their money to safe havens such as the Dollar or Swiss Franc. Currently, the Turkish Lira and Argentian Peso are drawing attention. There, interest rates fell by more than 15% in 2018. However, the chances are good that, in a few months, this will have proved to be the tip of the iceberg.
Laurens Maartens (laurens.maartens@nbwm.nl) is foreign exchange expert at the Nederlandsche Betaal & Wisselmaatschappij (www.nbwm.nl). He started his career at the Swiss bank, UBS. Since then, he has worked at various foreign and local companies. He comments on current currency developments in newspapers, on websites, and on the radio. He also gives lecture and training to businesses in the area of currency management. Here, he stresses to participants to choose mainly simple, inexpensive foreign exchange products. This column reflects his personal opinion. This information is not meant as professional investment advice. It is also not intended as a recommendation to make certain investments with the Nederlandsche Betaal & Wisselmaatschappij NV.