Doha / QATAR: Emerging-market currencies are trailing their peers in advanced economies by the most since 2009 as a global recovery eludes countries from China to Brazil. The 20 most-traded developing-nation currencies tracked by Bloomberg weakened an average 5.3% against the dollar in the past three months, compared with a 1.1% gain for the six comprising IntercontinentalExchange Inc’s Dollar Index.
That is the biggest gap since the height of the banking crisis four years ago. Options prices signal that the Indonesian rupiah, Turkish lira and Brazilian real will tumble further.
Prints of R$50 Brazilian reais bills sit on a table for inspection at the Casa
da Moeda, the national mint, in the Santa Cruz suburb of Rio de Janeiro
At a time when US manufacturing is expanding at the fastest pace since 2011, developing-nation industrial output is at a four-year low as China’s slowdown cuts demand for everything from Brazilian iron ore to Malaysian palm oil. Economists predict US growth will quicken to 2.7% next year from 1.6% in 2013, while forecasting China will expand 7.5% versus an 8% median estimate in May, data compiled by Bloomberg show.
“Developed-market growth has probably been a bit faster than anticipated and emerging growth has been a little bit slower,” Paul Denoon, who oversees $27bn as the head of emerging-market debt at AllianceBernstein Holding, said in an August 6 phone interview from New York. For developing currencies, “we’re definitely more on the cautious side,” he said.
Morgan Stanley’s strategists named South Africa’s rand, India’s rupee, the real, rupiah and lira the “fragile five,” because their countries are finding it increasingly difficult to attract foreign capital to finance trade deficits. Emerging countries accounted for nine of the 10 worst performers among 31 major currencies tracked by Bloomberg since May 7, with the real sliding 13% and the rupee losing 11%, touching a record low this week. Gains over the past three months were led by a 2.9% jump in Japan’s yen and increases of more than 2% for the Swiss franc and euro.
The 17-nation euro-region economy will grow 0.1% in the second quarter, ending an unprecedented six straight quarters of contraction, according to the median estimate in a Bloomberg News survey before official data on August 14. Economists predict 1% growth for the area in 2014 after a 0.6% contraction this year. The largest emerging economies of Brazil, Russia, India and China will expand 5.9% next year compared with 5.7% in 2013 and an average growth rate of 7.8% over the past decade, Bloomberg surveys show.
A gauge of manufacturing activities in developing countries fell to 48.8 in July, the lowest level since 2009, according to data compiled by Capital Economics Ltd. The purchasing managers’ index for US manufacturing jumped to 55.4 last month, indicating the fastest growth since June 2011.
“There remains a strong and growing divergence between developed markets and emerging markets in the momentum of economic recovery,” Morgan Stanley strategists led by Rashique Rahman wrote in an August 6 report. “We retain a cautious view for the medium term, particularly in currencies, given ongoing concerns over the growth outlook for emerging markets.”
India’s rupee weakened to a record 61.8050 per dollar on August 6, while Brazil’s currency touched a four-year low of 2.3162 on Wednesday. The yen strengthened to 96.22 per dollar yesterday from 98.88 three months ago, while the euro climbed to as high as $1.3369, the strongest level in seven weeks, from $1.3171.
About 54% of companies in the MSCI Emerging Market Index of stocks have reported second-quarter earnings that trailed analysts’ forecasts, compared with 35% for members of the developed-economy MSCI World Index, according to data compiled by Bloomberg.
The slowdown in China is contributing to lower prices for raw materials and commodity exporters in developing nations. China’s economy grew 7.5% in the second quarter, heading for the slowest annual expansion since 1990. Another 1 percentage-point decline in China’s growth would cut the average expansion of developing countries by 0.7 percentage point to 4%, a “stall speed,” Citigroup economists including Guillermo Mondino wrote in a July 22 note.
Even with the recent pickup in the developed world, the US and Europe are still expanding at a slower pace than the biggest emerging markets. On average, developing economies will grow more than four times the 1.2% rate in advanced countries this year, the International Monetary Fund forecast July 9.
The developed-world recovery will eventually spill over to emerging-market currencies as US and European customers increase purchases of exports, according to Steffen Reichold, an economist at Stone Harbor Investment Partners LP. “The theme has been taken a bit too far, and we think we’re going to see that turn over the coming months,” Reichold said in an August 6 phone interview from New York. Some currencies “have gotten quite a bit cheaper in the EM space” and “we’re in a phase now where we’ll likely see a bit of a rebound” in the Mexican peso, rand and lira, he said.
Option traders are the most bearish on the rupiah among the 31 most-traded currencies tracked by Bloomberg. They demand a premium of 5.4 percentage points for the rights to sell the rupiah over options to buy, according to the three-month risk reversal rate. The gauge reached an 11-month high of 6 percentage points on June 6, data compiled by Bloomberg show.
The premium for the real, lira, rand and Peruvian sol are at least 2.9 percentage points, compared with 1.3 percentage points for the euro, Swedish krona and Norwegian krone.
Capital is also fleeing developing countries since the Federal Reserve signalled in May that it may scale back the money it prints for its $85bn of monthly bond purchases, funds that contributed to demand for emerging-market assets in the past.
Sources: The Peninsula, Gulf Times, Caye Global News
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