Central banks have been out in force to stem their weakening currencies but at what cost?

Unless you’ve been living under a rock these last few weeks, you’ll know we have big flows in play. The majority has been flowing out of emerging market assets and into the good old US Dollar. Flows like that are fine when they’re measured and manageble but can cause huge economic problems when they become tsunamis. Central banks around the world have been fighting tooth and nail to contain these moves and lessen the impact to their currencies, and it’s coming at a cost.

That cost so far (since Feb by most counts) is estimated to be in excess of $30bn and rising, and central banks are facing big issues as their reserves dwindle fighting these fires. The list of interventions is long and covers from Southern America across to Asia. The Brazillian Central bank was intervening on Monday to stop six straight days of BRL weakness. Indonesia is said to have have intervened to the tune of $7bn so far. The Argentine CB has been throwing $5bn clips up to the 25.00 level in USDARS, while India’s FX reserves are down over $8bn and the Hong Kong Monetary Authority is said to have blown $6.5bn defending the 7.85 level, the top of their peg range.

As we’ve pointed out frequently recently, these central banks are on the wrong side of this trade. They have to use their foreign FX reserves to buy their own currencies, as opposed to printing money if their currencies were strengthening. Some of these countries have decent reserves but some don’t. Turkey is one such country that doesn’t seem to be intervening and their currency is taking a pasting. They have low reserves and also a leader who thinks he knows how to soleve the problem on his own. That one is a ticking time bomb.

And there in lies the big issue. We’re slowly approaching panic levels for these moves and if fear really starts to grip the market  then the central bank barriers could crumble. If we get a country like Turkey blowing up it’s going to lead to a run on EM FX that will make the current moves look like a walk in the park. I’m not trying to sound overdramatic about this but there’s plenty of people who have been waiting and wondering what Global Financial Crisis 2.0 will be, and it could very well come from this situation. One would hope that major central banks are watching this carefully too with a view of stepping in (at least verbally) to support other central banks. If they’ve got their heads up their arses and are ignoring it, then we could be in for fireworks.

I don’t suggest we’re close to a blow up but as we saw with the GFC, all it took was one relatively small house of cards to tumble to nearly bring the world to its knees.

Except for the Turks, there’s been some respite for these beleaguered central banks over the last day or so but we need to be wary that this might just be a pause while the CB’s shore up their defences.

EM FX 23 05 2018


Even if you’ve never looked at EM pairs in your life, you need to have one eye on them now and for the foreseeable future as they are still the main driver for the majors right now.

Ryan Littlestone

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