Over the last 6 months, emerging market (EM) currencies plunged against the backdrop of a trade war with the United States and a tightening of the Fed's monetary policy. Indeed, the Turkish lira has dropped 41% over the last 6 months. The Argentine peso, meanwhile, lost nearly half of its value. Other EM currencies are not left behind: the Indian rupee, the Russian ruble, the Brazilian real and the South African rand lost respectively 10.4%, 18.7%, 22.1% and 22.2% over the same period. The VXY-EM index, that measures the volatility of the main EM currencies, is constantly increasing and peaked at the beginning of August, highlighting sharp declines over a few days in the Turkish lira and the Argentine peso.
Main EM currencies vs. volatility index (EM currencies: 100=09-03-2018)
If some causes of the downtrend are more idiosyncratic, the overall context is not as hopeful and largely explains the downward trend observed in recent months. Indeed, the United States has embarked on a genuine trade war, particularly with the increase of tariffs on aluminum and steel imported from its main trading partners. Moreover, the rise in key interest rates in the United States is hurting EMs because foreign investors prefer to go to the United States, which now offer good returns for a contained risk, decreasing de facto foreign investment in EMs. The local currency loses ground against the USD, which consequently drives up the cost of imports and with it inflation which only encourages foreign investors to resume their stake. This crisis, if it is one, strongly recalls the Asian crisis of 1997, when the Thai baht had lost almost all of its value, dragging down the other Asian currencies in its wake...
Julien Moussavi, Head of Economic Research - Sources: Beyond Ratings, Datastream