Emerging Markets Currencies - The Next Crisis

Where will the credit crisis’s penny drop next? On center stage, at the moment are emerging market currencies, having crashed in many instances over the past few weeks. A picture tells a thousand words… (Yes, South Africa has been highlighted as it is my base currency, and my overseas overheads have just become exponentially more expensive. However, your holiday to this part of the world has also just become a bargain.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

The jury is still out as to whether or not some of the declines in emerging currencies simply represent an adjustment from overvalued, to levels that are more realistic. The risk of national defaults and corporate bankruptcies holds the key to what represents fair value.

The histogram below shows the performance of a number of major currencies since the middle of July 2008. The left-hand bar represents the U.S. Dollar Index, whereas all the other currencies are the normal exchange rates against the dollar.

Source: StockCharts.com

The only two currencies in positive territory are the U.S. dollar and the Japanese yen – both previously carry trade currencies due to their low interest rates and weak price trends prior to the reversals. The surge in the value of the U.S. dollar and yen and the concomitant decline in other currencies confirm the ongoing scramble to reduce liabilities and deleverage.

However, it appears that some of the currency trends have become overstretched, at least temporarily. A viewpoint that ties in with mine comes from Bill King (The King Report):

… dollar might be exhausted for now and a significant pullback could appear. However, there should be more hedge fund liquidations and commensurate dollar buying in November as investors try to meet the November 30 deadline to withdraw funds from hedgies and fund of funds.

Then there could be one last dollar surge in December as banks, brokers, operators, non-financial companies, and other dollar shorts cover their positions for year end. But there could be an even larger dollar-buying force in December: foreign banks, especially the Japanese, which must procure term money for year end. But after year end obligations have been met, the dollar could be very vulnerable.

Be careful out there!

Comments

[HKI:]

LOL, not sure how good the King Report is but getting simple fact straight will be a good start. Japanese year-end is in March, not Dec.

2008 Oct 26 09:17 AM

[NOWHEREMAN:]

Is the Pebble Reactor still being constructed?

Selling of the Dollar has already begun. Since the Asian contagion, many emerging countries increased their dollar reserves. They are losing purchasing power despite this.

First Russia selling dollars for Rubles, then this week Brazil doing the same(3 times in one day), Taiwan eschewing US debt, India considering Dollar Sales But Most importantly the Mid East with $2.5 Trillion saying it may have to sell dollars to offset the Oil Price decline to support its Economic Expansion.

When the dollar turns South again, no nation holding dollars will want to be left behind. The collapse will be faster than the rise.

2008 Oct 26 11:14 AM

[surgcare:]

Can you say "DOLLAR BUBBLE".

2008 Oct 26 12:30 PM

[secmaven:]

The world has voted for Obama with their pocketbook. With Paul Volker on board the strong dollar is here to stay.

2008 Oct 26 03:58 PM

[Yogo:]

I'm still going for Brazilian treasury bills.

[e-mail]

2008 Oct 26 04:41 PM

[Yogo:]

Are you still interested in Brazil Treasuries bills and Notes?

[e-mail]

2008 Oct 26 04:45 PM

[NOWHEREMAN:]

Governmental Debt will exceed GDP, probably has already but we are unable to quantify it because the creation of Dollars is so fast and furious that no one can keep up with the amount.

When it does, what backs the value of the dollar? GDP will go down for the forseeable future but dollar creation will continue unabated, both candidates will want to lower taxes and provide economy stimulating packages.

Fiat Dollars first equaling then doubling GDP, sounds like the escapade of a Banana Republic. I don't know when the Dollar Bubble will burst, but it will.

2008 Oct 27 11:58 PM