Emerging market currencies like the Turkish lira and the Argentine peso have been sharply depreciating due to political turmoil and high inflation. Speaking to CNBC-TV18’s Sonia Shenoy and Latha Venkatesh on what lies ahead for the EM currencies, Mitul Kotecha, Global Head of Currency Strategy of Credit Agricole says that Argentina’s high inflation of around 30 percent led to the weakness in its currency.
Kotecha also believes the fragile five that includes Brazil, Indonesia, India, Turkey and South Africa will continue to remain weak given the global worries, weak earnings momentum and also China’s poor PMI data.Also Read: Use selloff to hedge; bullish on US growth: John Woods
Meanhile, Kotecha feels that rupee will probe towards 62.50 or more against the dollar though there are concerns ahead of elections. “We will be playing weaker bias but until we get some clear outcome we are not going to see dramatic moves,” he adds.
Below is the interview of Mitul Kotecha, Global Head of Currency Strategy of Credit Agricole on CNBC-TV18.
Latha: How serious is the problem in Argentina and Turkey, is it likely to have a ripple effect on other emerging market currencies at all?
A: When you talk about both the Argentinean currency and the Turkish currency, they are both beset by specific factors as well as a generalised increase in risk aversion. For instance, in Argentina there has been a very significant increase in inflation. Inflation is running close to 30 percent and their currency therefore, was in line for some weakness and this devaluation perhaps should not be a massive surprise. It is needed to be done given the extreme pressures on the economy and there may be more of this to come. Similarly, in Turkey there are political problems and the corruption probe. Economically, Turkey is also facing again rising inflation and economic pressures. So these are specific factors. The knock on impact is not so much from both these moves and is more general impact of higher risk aversion on many emerging market currencies.
Latha: So the fragile five are not going to get fragile at all again because of these?
A: On the plus side what we have been seeing is a drop in the US bond yields and that has provided a bit of breathing room for some of the emerging currencies like the fragile five. But at the same time, there are worries about the global environment, the earnings momentum. The equity momentum generally seems to be weakening as we go into January - growth concerns in particular on some of the big emerging markets. We had some prints out of China this week that raised concerns about the current economic growth there and that has had some overlay on emerging market in Asian currencies. The reality is, there is a combination of factors here that indicate that fragile five will continue to remain fragile.
Sonia: How would you move on the rupee then because we have seen that the bond inflows have been one of the biggest factors that have supported the rupee, what would you view be on the range now?
A: I would still edge towards the weaker end of the range. I feel we are going to probe towards 62.50 or higher in terms of dollar-rupee. There are still going to be concerns ahead of elections but at the same time it does seem that a lot of investors are sitting on sidelines given the uncertainty around the election outlook and what it will mean for policy. So, we will be playing weaker bias but until we get some clear outcome we are not going to see dramatic moves.
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