Emerging market central banks rush to curb rapid currency depreciation

In the last 48 hours we have seen emerging market central banks take bold decisions in order to curb severe currency weakening as turmoil in emerging markets strengthened, and investors rush towards safe haven currencies. The Reserve Bank of India was the first to get the ball rolling in a surprise move raising interest rates by 25 basis points to 8%, in a bid to fight back against inflationary pressures.

The Turkish Lira was one of the worst affected currencies as political concerns also weighed on the currency. In an emergency meeting the Turkish central bank raised all the main interest rates, in an attempt to stabilise the currency. The overnight lending rate rose to 12% from 7.75%, the overnight borrowing rate rose to 8% from 3.5% and the one week repo rate increased to 10% from 4.5%.

The South African Reserve Bank also followed suit as the nation battles with labour disputes. The bank raised its borrowing rates by 50 basis points to 5.5% in spite of the fact that inflation remains with the central bank’s target range of 3%-6%.

Despite all these efforts to prevent further currency weakness, any gains after each announcement were soon erased. The market seems to be unimpressed by central bank’s attempts to convince the markets they are ready and willing to take action. Turkey’s central bank’s move could be described as delayed, and although the SARB rate increase was unexpected, it failed to grab investors’ attention. What the market needs is to be convinced that these central banks are completely committed and engaged in consistent aggressive policy in order to ensure not just a stable currency, but also price stability.

Sasha Nugent

Currency Analyst 

Caxton FX

Why is the South African Rand so weak?

The rand has been on a downtrend for a while now; it was overvalued for a start but political uncertainty has really triggered quite an aggressive depreciation in recent months. Uprisings have sprung up across the country, with the death toll reaching fifty. Mineworkers are particularly prominent within the uprisings, with demands for wage increases the key driver of national anger.

President Zuma is under huge amounts of pressure and will struggle to be re-elected; latest approval rating suggests only 32% support the man in charge. Zuma has given himself a 5.5% pay increase recently – so it’s no surprise that he is under the cosh.

Naturally, this has limited the productivity of the country’s key economic growth contributors, such as its iron ore, platinum, trucking, wine and fruit industries. This is having a material impact on South African growth, GDP expectations have been repeatedly downgraded by the South African Reserve Bank. The outlook is pretty bleak too, with inflation high, unemployment likely to rise and global demand for South African exports likely to decline (particularly from the eurozone).

Unsurprisingly, investor confidence has taken a major hit; the use of armoured vehicles, rubber bullets and tear gas is not conducive to rampant commerce. With investors making for the exit, the rand has plumbed fresh multi-year lows across the exchange rates and with no real sign of the social and political unrest easing up, the rand is likely to remain on its downtrend for at least the next six months to a year. 

Richard Driver

Currency Analyst 

Caxton FX