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Global Outlook

Currency Chaos

January 27, 2014, Monday, 22:55 GMT | 17:55 EST | 03:25 IST | 05:55 SGT
Contributed by eResearch


China spooked the emerging market community yesterday with its negative manufacturing PMI reading, as it's obviously a big consumer of world raw materials and a key trading partner for emerging markets and the world economy at large. Certainly it's worth worrying about, although perhaps too early to start panicking given that it was just one month of slowdown while there's also the aspect of the upcoming Chinese New Year holiday that does tend to skew economic data this time of year.
 
Well, the emerging market investors are taking it a step further today, specifically currency traders. It may have been sparked by Argentina, whose central bank yesterday decided they would not allocate money to support their peso. Consequentially, the peso tanked by more than 15% against the dollar; Argentina took emergency measures today to allow for dollar purchases again, which had been banned since 2012, to regain stability in the currency market.
 
 
 
Chart Courtesy of XE.com
 
And now emerging market currencies are being put into the spotlight and the Fed is rearing its ugly head once again. The Fed is expected to continue winding down its QE program this year and that's got the currency traders sweating a little bit more today about an impending imbalance in the global currency markets that cheapens all the emerging markets' currencies against the benchmark dollar. It's all very speculative, really, but it's taking its toll at least for today.
 
Alongside the Argentinean peso, we have the Turkish lira down almost 7% against the dollar this month and diving to new record lows:
 
 
 
Chart Courtesy of XE.com
 
The South African rand fell approximately 1.1% today and is at its lowest point versus the dollar since 2008:
 
 
 
Chart Courtesy of XE.com
 
The Russian ruble hit a new record low against the euro, and the weakest value against the dollar in five years:
 
 
 
Chart Courtesy of XE.com
 
Of course, the worries about a Fed-induced global currency imbalance carry a whiff of conspiracy/doomsday mentality, and in reality it may just be part of the broader market selloff. Indeed, there is worry that world trade is in the midst of a slowdown and these are times when the naysayers start to come out of the woodwork.
 
The fact remains that in the grand scheme the market is still just barely off of the record highs and in fact you would be prudent to at least bag one or two profits. But it's far too early to begin to panic.