The South African rand and the Turkish lira are becoming the Delicate Duo of emerging market currencies. During last year’s retreat from emerging markets, currencies of five countries – Brazil, India, Turkey, Indonesia and South Africa – stood out for the magnitude of their losses. Their big balance of payments deficits and reliance on foreign capital earned them the collective moniker of the Fragile Five.
But as 2014 gets underway, the lira and rand appear to have broken away from the others, weakening further in contrast to the stabilisation in the Indonesian rupiah, Indian rupee and Brazilian real.The lira and rand have slumped 5-6% in the past month against the dollar while the rupee has risen 11% off last year’s record lows. The rupiah and real have recovered 1.4% and 3.8% respectively from five-year lows. “It’s correct to say that there is differentiation between the Fragile Five based on how central banks are addressing the concerns of investors,” said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch.
“It’s fair to argue that India, Brazil and Indonesia have been more pro-active in addressing the concerns.” Turkey shied away from raising interest rates again this week while South Africa has not stood in the way of rand weakness, betting it will help the current account adjust.
But Brazil has raised rates by 325 basis points since last April, while Indonesia has increased its benchmark rate by 175 bps since June and is expected to do more. India has unveiled a series of reforms and taken steps to cut its deficit.