Emerging market currencies slumped to 15-year lows as China’s equity rout and free-falling commodity prices reverberate throughout the global economy.
Raw-material exporters Brazil, Russia and Colombia have suffered some of the heaviest sell-offs as falls in commodities such as oil, copper and iron ore continued unabated this week, with Brent crude falling to its lowest level since February.
The turbulence is expected to increase once the US Federal Reserve chooses finally to increase interest rates from near-zero levels, a move which will probably have a chilling effect on developing markets.
James Lord, emerging market strategist at Morgan Stanley, said the Fed was an “ever-present risk.
“Any change in expectations about the first US rate hike driven by strong US economic data could add to the existing volatility,” he said.
Approaching the close of Asian trading on Wednesday, the Thai baht was down 0.31 per cent against the dollar, the South Korean won was up 0.53 per cent, while the Malaysian ringgit and Indonesian rupiah were flat.
Currency markets act as a bellwether for investor sentiment, so the slump raises the likelihood of a deeper sell-off in equity and debt markets.
The MSCI Emerging Markets stock index is down 10.9 per cent this year while government and corporate borrowing costs in emerging economies including Brazil, Turkey and Russia have increased.
“The next risk is that continued volatility in Chinese financial markets will trigger a further reaction in global capital markets, especially if other risks also materialise,” said Alberto Gallo at RBS.
Beijing’s failure to stabilise its domestic stock market in recent days after an unprecedented sell-off has alarmed global investors.
It has undermined faith in the world’s second-biggest economy, driving down commodity prices and leaving developing markets vulnerable to the aftershocks.
Brazil’s real and the Colombian peso have fallen 22 per cent and 17 per cent respectively this year, helping to send the JPMorgan Emerging Market Currency index, which measures the strength of the most traded developing country currencies against the US dollar, to the lowest level since it was created in 1999.
