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Most Vulnerable Emerging-Market Currencies

Emerging Market Currencies are weakening unrelentingly but some of currencies with big losses are the ones that face both global and local pressures. We take a look at three currencies: South African Rand, Brazil Real & Malaysian Ringgit. The sell-off in emerging market currencies is due to three common reasons; first being the slowing growth in China, second being weak commodity prices and third being the prospect of the first rate hike by Fed in over a decade. However, for our three chosen currencies there are also country specific issues.

The reasons for BRL weakness are global and domestic; as specified before the prospect of the US first interest rate hike, a slowdown in China’s economy and weak commodity prices are reasons affecting most EMC, but specifically the deterioration of the political and economic situation in Brazil and the downgrade to junk status by Standard & Poor’s are reasons specific to Brazil. Without a credible plan for Brazil's fiscal crisis and the lack of confidence in central government, we foresee more financial problems and further strength for USDBRL.

The South African Rand is now at all-time traded lows vs. the Dollar, through the lows seen in 2001; this is largely due to a dire state of mining and manufacturing sectors where output shrank by 6% in the second quarter due to weak demand, electricity constraints and rising costs.  The Steel industry in particular is facing tough challenges because China's slowdown has led to weak demand plus China is flooding the local South African market with cheaper steel. There are other structural problems such as infrastructure issues, and lack of reforms in the Labour market. A further deterioration of the Chinese economy and the local issues may lead the already vulnerable economy into a recession, hence we see continued ZAR weakness.

The Malaysian Ringgit has hit lows last seen in January 1998; country specific reasons are collapsed terms of trade, political uncertainty and loss of investor confidence. Investors have continued to pull money out of Malaysian government securities as allegations of the mismanagement of the state fund (1MDB) have come to the fore, Prime Minister Najib Razak is the chairman of its advisory board. We see outflows continuing as none of the investors’ concerns have subsided.

Click to enlarge monthly bar charts: USDBRL, USDZAR & USDMYR