Emerging Markets Currency Roundup

Concerns over the resumption of selling in the commodity markets, China’s slowdown and the market’s adjustment to higher US interest rates led to volatility and losses in the international stock markets throughout January. Downward pressure also remained on the EURUSD with the most popular currency pair falling as low as 1.0718 in the first week of January, before regaining ground by the end of the month and rising to 1.0989.

Commodities told a mixed story, with Oil dipping below $30 per barrel and Gold rising past 1120 USD per ounce. The bearish trend in Oilcontinues to be dominated by an ongoing oversupply in the market, while there are also concerns over slowing demand for the commodity due to weak global growth. The increase in the price of Gold signals that investors might be hedging towards safe-haven assets as investorscontinue to be alarmed by concerns over international market volatility and an acceptance that commodity prices are set to remain depressed for an extended period, which will also drive GDP prospects lower.

Emerging currencies were buffeted by these headwinds with the Malaysian Ringgit, Indian Rupee, Indonesian Rupiah and Nigerian Naira all returning close to milestone lows against the Dollar. Losses in the emerging market currencies were also accelerated by fears over the weakening of the Chinese currency, with the USDCNY jumping from as low as 6.4805 to as high as 6.6048.

The emerging market currencies remain at heavy risk due to concerns over China’s economy, and their currencies did face punishment as the People’s Bank of China (PBoC) continued to set the reference rate for the USDCNY higher at the beginning of the year. This is clearly being seen by many as an effort to reinvigorate economic momentum in China by making their exports more competitive, while also encouraging inflation pressures as importing into China becomes more expensive.

The USDINR went through peaks and valleysduring January, moving from a low of 66.1253 to a high of 68.1619 towards the end of the month, pressured by the US Federal Reserve’s interest rate decision in the final days of January. It has become a common trend for emerging market currencies to come under extreme selling pressure before the Fed’s monthly rate decisions, with anxieties ongoing that the Fed will raise interest rates once again in the upcoming months following the first interest rate rise in December 2015.

The Indian Rupee is still falling victim to a weak sentiment towards the emerging markets, and it is likely that the central bank are still having to intervene in the FX markets to defend the local currency. The positive news for India is that the economic data is looking strong and it appears that the lower interest rate environment has had a positive impacton consumption. The negative news for the currency is that the robust GDP outlook is not yet having an impact on the Rupee, and that the local currency is still vulnerable to further gradual declines if the emerging market sentiment remains weak.

Indonesia’s currency – the Rupiah – was no exception to the volatility. The USDIDR was seen moving from 13590 to 14069 in dramatic fashion, impacted by the unfortunate explosions in Jakarta and an overall bearish sentiment for emerging currencies. The underlying fundamentals don’t paint a pretty picture; Indonesia missed its GDP target of 5.7 percent for 2015, finishing the year at the lower-than-expected level of 4.73 percent. A widening deficit is also being eyed by investors as a sign of future economic risks.

The Indonesian Rupiah had a disappointing start to the year, with the local currency seeing its sentiment weakened by various different factors. Investor sentiment was obviously weakened by the tragic explosions in Jakarta, while the resumption of selling in the commodity markets also led to the USDIDR returning above 14000. With Indonesia being seen as a heavy commodity exporter alongside strong trade links to China, GDP output is expected to continue slipping lower and I believe this may result in an interest rate deduction by the Bank of Indonesia.

Nigeria’s central bank is faced by a Naira weakened by low Oil prices and the global slowdown, but it has so far declined to lower the current interest rate of 11 percent or to devalue the currency. The USDNGN moved between a low of 198.0000 and a high of 199.4097, and with the Oil prices set for a short-term bearish future, the volatility is likely to be making its presence felt in the coming months.

There might be some expectations that the Nigerian central bank will need to reduce interest rates, but I think that the weakening Naira will lead to higher inflation pressures and this means that reducing interest rates might not be an option for the central bank. With the oil markets hitting further milestone lows and dropping below psychological support levels, it looks like depressed commodity prices will remain a trend for a prolonged period and this basically means that the Naira will also remain depressed. There is very little that the Nigerian central bank can do to combat this, and a potential rebound in the Naira can only be helped by an improved oil price.

Out of all the emerging currencies, the Malaysian Ringgit fared the best in January with the USDMYR moving in a range between 4.14 and a high of 4.43. The clearing of Prime Minister NajibRazakfrom the 1MDB scandal and the hopeful conclusion to this saga should improve investor confidence.

The combination over the clearing of Prime Minister Najib from the 1MDB scandal and an improved rebound in the oil markets at the end of the month led to a positive conclusion to January for the Malaysian Ringgit. We have seen a rebound for the Malaysian Ringgit, but I am wary that the currency has reached a “top” for now. I also expect for the revision to the budget to only have a short-term positive impact on the local currency.

What Malaysians need to focus on is the oil markets, because the failure of WTI oil to surpass $35 on Friday 29thJanuary would have encouraged profit-taking from traders. This will also increase the risk of WTI oil returning close to $30 in the opening trading days of February, which also means that the USDMYR is at risk to returning above 4.20.

Overall, it was a challenging first month for the emerging currency markets with renewed selling in the oil markets and the resumption of concerns over the China economy leading this currencies to losses.