Emerging market currencies look grim: Nirmal Bang
Although emerging market currencies have depreciated significantly, Brazilian real and Indian rupee have fallen more than the others, says Nirmal Bang research report.
August 05, 2013 / 12:34 IST
In the last two months, emerging market currencies have depreciated significantly. First, because of poor fundamentals and then following the news that the Federal Reserve is likely to wind up the quantitative easing program sooner than later.
Following the news from the Fed, the US dollar witnessed a significant rally. The Dollar Index, a measure of strength of the US dollar against a basket of other currencies, increased from 80 to 84 in close to 20 days.Though the dollar gained momentum, not all emerging market currencies plummeted by a similar percentage. However, the overall situation for emerging market currencies looks grim. It is not only the news from the Fed but also individual country's macroeconomic condition that has compounded the situation.For currency traders/investors, it would be a good idea to have a comprehensive review of the performance of most emerging market currencies. This would give them an idea as to how much domestic macroeconomic factors have contributed towards the recent fall in the rupee.The depreciation in emerging market currencies started much before the Fed news came into the market. One reason for this could be that the market had already anticipated this news and some of its impact was already priced in the forex market.Another reason could be that macroeconomic fundamentals of these economies have already taken a toll on their currencies.If we look at last three month's data for major emerging market currencies like Brazilian real, Mexican peso, South African rand and Indian rupee, the trend is clearly visible.Though all these currencies have depreciated by a significant amount, Brazilian real and Indian rupee have fallen more than others. For instance, Mexican peso has depreciated only by 5 percent whereas South African rand has fallen by little more than 8 percent during this time period.Similarly, the Indian rupee has fallen by a little over 10 percent and Brazilian real has lost more than 13 percent, one of the highest among emerging market currencies. Other Asian emerging market currency like the Philippine peso has lost little more than 4 percent. Though the fall in the Indian rupee might have majorly impacted small-time currency traders, it is clear that this is not an isolated event and the impact on the Indian currency stands somewhere in the middle. And economic fundamentals have a bigger role to play in all of these.Let us look at some key macroeconomic parameters of these emerging economies.Current Account Deficit (CAD), a key parameter in currency valuations has been unfavourable to India since quite some time. According to recent news, the current account deficit of India narrowed down to 3.6 percent of GDP in the January-March quarter but totaled a record 4.8 percent for the full 2012-13 fiscal.The current account deficit of India is now more dependent on portfolio flows and, hence, more vulnerable.As per recent news reports, the current account deficit of Brazil stands at 3.2 percent on a 12-month basis. This was just 2 percent back in December '12. The rising trend is making analysts/investors more worried. On the other hand, the Mexican current account deficit remains at a pretty comfortable level. Last reported in May '13, the figure stands at 1.8 percent of the gross domestic product (GDP) and this is lower than what was reported previously.Not surprisingly, the Mexican peso has performed relatively better than the Brazilian real and the Indian rupee. Similarly, the South African current account deficit (CAD) shrank to 5.8 percent in the first quarter.Though the number itself looks higher, it came as a big surprise to the market, which was expecting an expansion in CAD rather than contraction. This positive surprise was a result of increased export made possible by a weak South African currency. The market welcomed this news cheerfully and the African rand recovered at least 2 percent from its lows.Other than the current account deficit, the reason for the Brazilian real and Indian rupee's underperformance against their peers in emerging markets is the geopolitical situation in these countries.There has been civil unrest in Brazil which would make it difficult for the government to take tough decisions. Back in India, the central government has few allies left to support it. And with general elections coming up next year, it would not be easy for the government to take decisions regarding foreign direct investments, increasing petrol and diesel prices and so on.Forex traders are quite aware of these facts and have punished these currencies accordingly. Though the psychological level of 60 Rs/USD has not been breached decisively, the risk of the rupee staying below 60 for an extended period of time cannot be ruled out.Source: Nirmal Bang's Beyond MarketClick here to read the full magazine Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
