The euro zone crisis hammers Emerging Market currencies
Until a few weeks ago, emerging market currencies were holding it pretty well. Consolidating historic gains against the dollar over the first half of the year, they reflected investors’ confidence in economies seemingly ‘decoupled’ from the convalescent, slow-mo Western world. Some even saw them as the new ‘safe havens’, isolated from the gyrations of stock exchanges and promised to a bright, stable future.
Well, no more. The troubles suddenly started last week and affected almost everyone (see previous post). Yet they spread with diverse intensity across the category, and some currencies even got out of the general slide unscathed. The unequal fortunes of emerging markets, we thought at the time (a week seems like a year these days), came from investors’ views on divergent monetary policy choices (mainly their determination in fighting inflation). And other domestic factors.
But today is a different story: the sell-off seems indiscriminate. Everyone is down, and even currencies deemed ‘invincible’, like the Indonesian Rupiah or Chinese Yuan, show signs of weakness. Why? Well, as the gloom over the Euro zone crisis rapidly mutes in proper panic, investors take their cash out of emerging markets and return to the real ‘safe havens’ - the good old US Dollar and the immaculate Swiss Franc. And the general flight to safety actually hurts more than currencies, it also hammers equities and bonds across the globe. So apparently, it’s nothing personal.