Tuesday, September 3, 2013

Emerging market currencies are tumbling versus the U.S. dollar

Citibank has published a great graphic that shows the predicament emerging market policymakers now face as their currencies slide lower in value:

Source: Citibank

These emerging market currencies yield more than the U.S. dollar. That’s led many investors into new emerging market carry trades, where they borrow U.S. dollars and reinvest in foreign currencies, earning a spread from 6% and up to 14% on currencies like South African Rand, Russian Ruble, Turkish lire, Brazilian Real, and Indonesian Rupiah.

But the same buyers who poured into these emerging market currencies are now rushing out. As the Citibank graphic above shows, this leaves policymakers with no good options.

They could: raise interest rates and attract more carry trade buyers, but that would slow or choke economic growth. Buy their own currencies in order to thwart price decline, but they’d deplete their currency reserves. 

Do nothing and allowing the free market to work, which would let their currencies continue to decline until a sustainable level is reached.

Geir Solem

Elliott Wave Technician
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