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The Debacle in Emerging Markets

The pending Federal Reserve interest rate hike, China's economic slowdown and the collapse in commodity prices, three not entirely unrelated events, are playing havoc with currencies across the globe from Brazil to Singapore to Russia.

The three biggest losers this month are the currencies of Singapore, Taiwan and South Africa down 2.4 percent, 2.3 percent and 1.9 percent, and on the year respectively 12.8 percent, 8.5 percent and 21.7 percent. 

But they are hardly alone. Over the past year against the U.S. Dollar, the Canadian Dollar has plunged 20.2 percent, the Australian Dollar  27.7  percent, the  Malaysian Ringgit 29.7 percent, the Norwegian Krone 34.7 percent, the Brazilian Real 55.0 percent, and the Russian Ruble 82.6 percent.  

Even the relatively modest losses of the Korean Won at 16.9 percent, the Indonesian Rupiah at 18.2 percent, the Chilean peso at 20.6 percent and the Mexican Peso at 25.9 percent have been large enough to make life in many quarters of their economies far more difficult.  

The JP Morgan Emerging Market Currency Index is off by 24.9 percent since last August. 

The Federal Reserve has been planning and talking about a rate hike for most of the past year. Whether the first increase in eight years comes in month, in December or sometime next year, the market has had plenty of time to adjust to the new American interest rate reality.

The rising value of the greenback has put pressure on the entire commodity complex because almost all commodities are priced in U.S. Dollars and as the worth of the dollar increases commodity prices decrease.  The Bloomberg Commodity index has retreated 29.5 percent in the last twelve months to 89.29, its lowest reading in more than 13 years, since February 2001.

But it has been the slowdown in world economic growth and particularly in China that has had the greatest effect on commodity values and by extension the currencies of resource based economies like Brazil, Russian, Canada and Australia.  

The financial turmoil created by 27.5 percent fall in the Shanghai Composite Index and the Peoples Bank of China surprise devaluation in the Yuan, has only underlined the unknown severity of the problems facing the Chinese authorities.

The currency adjustment necessitated by the incipient ratepolicy change in the United States will be minor compared to the potential debacle in commodities and emerging market and resource currencies if China leads the world into recession.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

em aug 18

bcomp aug 18



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