When global capital returns to the local currencies of emerging countries, the local currency exchange rates of these countries fluctuate greatly! Foreign trade companies need to pay attention!
The currency appreciation momentum of the “Fragile Five” countries is strong
The “Fragile Five” (Fragile Five) ) concept first appeared in 2013 and was proposed by economists at Morgan Stanley. The five countries are South Africa, Brazil, Turkey, India and Indonesia. Morgan Stanley economists believe that these countries are too dependent on foreign investment and borrowing. The cost is greatly affected by the withdrawal of QE by the Federal Reserve. As foreign investors withdraw, the local currency is under tremendous depreciation pressure.
“Nihon Keizai Shimbun” recently published a report entitled “Global Capital Returns to Emerging Countries’ Local Currencies”. The article pointed out that international capital is flowing to South Africa, known as the “Fragile Five”, The local currency of Brazil and other countries. The exchange rates of the local currencies of these countries against the US dollar have changed from the sharp decline after this spring, and are now returning to an appreciation tone. This is mainly because global quantitative easing has led to the inflow of capital with strong risk appetite into these countries, but some people have also begun to worry that the sharp appreciation of the local currency will have a counterproductive effect.
In the Tokyo foreign exchange market on the 16th, the South African rand’s exchange rate against the U.S. dollar rose to 14.8 rand per U.S. dollar, the highest level since February this year. The Brazilian real’s exchange rate against the U.S. dollar rose to nearly 5 reals per U.S. dollar, and the Indonesian rupiah exchange rate also reached 14,000 rupees per U.S. dollar, both reaching their highest levels in half a year.
When the COVID-19 epidemic first began to spread this spring, the rand’s exchange rate against the U.S. dollar once fell to 19 rands per U.S. dollar, and the real exchange rate also fell to 1 The U.S. dollar was trading at 6 reals, but it has now stopped falling and rebounded. The Turkish lira and Indian rupee also showed the same trend.
The stock markets of these countries have also improved. The South African stock market’s FTSE/JSE index rose by about 60% compared with mid-March, and the Sao Paulo Stock Exchange index in Brazil recorded a 90% increase.
The first thing to mention is the trend of global risk appetite investment. The U.S. presidential election has finally settled, and some countries have begun vaccinating their citizens with the COVID-19 vaccine, which has played a greater role in reducing uncertainty about the economic outlook.
Since March, the economic countermeasures adopted by the governments of Japan, the United States and Europe and the large-scale quantitative easing measures implemented by the central banks have also had an impact. Stimulus policies have provided the market with ample funds, and interest rates in developed countries have fallen. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, believes that excess capital is turning to investments in emerging countries with higher returns.
However, the specific situations in different countries are different. The key indicator is the current account balance. If the current account balance continues to be in surplus, the foreign exchange obtained through trade and services will need to be converted into the domestic currency, which will contribute to the appreciation of the domestic currency.
In South Africa, where the local currency appreciates strongly, the current account surplus in the third quarter of this year reached 297.5 billion rand, much higher than market expectations. This is because, on the one hand, the price of platinum, South Africa’s main export product, has risen to a high of more than US$1,000 per ounce due to changes in risk appetite; on the other hand, the domestic economic stagnation has led to a reduction in imports. Brazil, a country that once had a current account deficit, has also turned to a surplus.
Turkey, whose local currency exchange rate has been relatively slow to rebound, still has a current account deficit. The tourism industry, which is an important source of foreign exchange earnings, is also facing a continued sharp decline in European tourists due to the protracted epidemic. Kota Hirayama, a senior economist at SMBC Nikko Securities who studies emerging economies, believes that tourists will not come back until at least next spring, and it will not be easy for the Turkish lira to appreciate.
The prospects for vaccines are also unknown. Masahiro Ichikawa believes that the market’s expectations for the new crown vaccine are too high. Once the effectiveness of the vaccine proves to be low, or logistics problems prevent the expansion of vaccination coverage, capital may flee emerging countries en masse.
Some people have also pointed out that if the vaccine can be popularized in emerging countries, it may cause the devaluation of the local currencies of these countries. This is because the economic recovery of emerging countries will stimulate import growth, which may lead to changes in the current account. According to Hirayama Kota, if the new crown vaccine is widely vaccinated only in developed countries, the local currencies of emerging countries will continue to appreciate. Later, if the new crown vaccine is also popularized in emerging countries, the local currencies of these countries will face greater depreciation pressure. .
For emerging countries that hold a large amount of assets and bonds settled in US dollars, the positive significance of local currency appreciation is greater, because a strong local currency will push up asset values and reduce debt burden. If there is a momentum for reverse capital flows in the future, the headaches for these emerging countries may reappear.
The Central Bank of Libya adjusts the exchange rate of the dinar against the US dollar
The Central Bank of Libya stated on the 16th that for Further implementation of economic reforms in Libya will adjust the exchange rate of the Libyan dinar against the US dollar.
The Central Bank of Libya issued a statement on social media that day, saying that the Board of Directors of the Central Bank It was decided to adjust the exchange rate from the current 1.4 Libyan dinars to 1 US dollar to 4.48 Libyan dinars to 1 US dollar. The statement stated that the latest exchange rate will be officially implemented from January 3, 2021.
Since the overthrow of the Gaddafi regime in 2011, Libya has been plunged into years of armed conflict and political turmoil. The economy is on the verge of collapse and local banks are severely short of cash.
The currency of Iraq has depreciated sharply
The Central Bank of Iraq issued a statement on the 19th, deciding to depreciate the national currency for the first time. The nar depreciated significantly.
The Central Bank of Iraq set the latest exchange rate that day at 1 US dollar to 1,450 Iraqi dinars. Previously the exchange rate fluctuated around 1:1200. The central bank said in a statement that the reasons for adjusting the exchange rate were low oil prices and a liquidity crisis caused by the epidemic, which caused the government budget to face a large deficit.
Iraqi Finance Minister Ali Allawi issued a statement that day, saying that the Iraqi economy, including the exchange rate, is in urgent need of reform. This “difficult decision” will be to resolve the crisis and protect Iraq. An important step for the economy.
Iraq’s economy is highly dependent on oil, and nearly 90% of the government’s fiscal budget comes from oil revenue. Affected by the previous plunge in international oil prices, Iraq’s oil export revenue has shrunk significantly, and the economy is facing severe challenges. </p
