Risk Management

Tough Times Ahead for Emerging Market Currencies

Economists expect further drops in exchange rates, but say lower commodity prices could limit how far the currencies fall.
Matthew HellerJanuary 8, 2015
Tough Times Ahead for Emerging Market Currencies

Emerging market currencies, some of which hit decade-lows in 2014, will again face challenging conditions this year including falling oil prices and expected interest rate hikes in the U.S., according to a Reuters survey.

Strategists and economists polled by Reuters predicted that all major emerging market currencies except the Mexican peso will drop further in 2015. Declines may not be as steep as in 2014, however, because lower commodity prices and tighter monetary policy in the U.S. could already be factored into exchange rates.

“The dichotomy between the monetary policy stances in the United States and the United Kingdom and those in Europe and Japan, coupled with falling commodity prices and a weaker Chinese growth and activity outlook, makes for a rather lethal cocktail for emerging-market currency risk,” Jeffrey Schultz, an economist with BNP Paribas Cadiz Securities, told Reuters.

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The Brazilian real, the Turkish lira and the South African rand, which fell near or more than 10% in 2014, are expected to slide 1.5% through 2015. But some analysts believe emerging market currencies will actually strengthen later this year, especially if the U.S. Federal Reserve tightens monetary policy slowly.

“People will realize it would not be the end of the world, and then the currencies will regain some ground,” Cristiano Oliveira, an economist with Banco Fibra in Sao Paulo, told Reuters.

Reuters noted that some countries differ on their exposure to lower oil prices and on their intervention in currency markets. In Turkey, a country that is a net oil importer, cheaper fuel may help hold the currency around current levels through the first half of the year, according to the survey. And both Turkey and Mexico have stepped up market intervention recently, whereas Brazil has reduced currency swap sales.

The Russian ruble fell around 40% against the dollar last year amid falling oil prices and Western sanctions over Ukraine. The most pessimistic estimate among those surveyed by Reuters had it dropping another 30% in 2015.

Source: Reuters