Volatility Hits Currency Markets
The downdraft in the commodity sector is starting to hit the emerging market currencies. According to a blog post by Trader Dan Norcini, the Brazilian Real just made a six year low against the US Dollar.
In an article on Bloomberg, it was cited that the Russian Ruble has slid 14% versus the US Dollar in the last 3 months. This is the worst performance amongst the 24 emerging markets that are tracked by Bloomberg.
This has caused speculation that the Russian Government could implement capital controls to prevent capital from fleeing the country. The volatility in currency markets right now is a good reminder of how quickly things can change.
Global Economy is Linked
The recent rise of the US Dollar has had global implications. With the Fed winding down it’s current QE program as well as concerns about overall global growth some emerging market currencies have come under pressure.
Whether or not the Fed can complete it’s tapering program without a major disruption in the currency markets remains a question mark. This is why in our view many countries are seeking an alternative to the US Dollar for global trade.
A depreciating currency can be an advantage in export markets. However, if the depreciation is too rapid it can cascade into a collapse which would be a problem.
So, the volatility will likely be very challenging for the Central Banks to manage.
New Currency Swap Agreements
Countries are looking to have more control over the fate of their own currency through swap agreements outside of the US Dollar. In an article on sovereignman.com, it was stated that China will now begin direct trading between the Renminbi and the Euro in the inter-bank foreign exchange market.
In a Reuters article, Russian President Vladimir Putin, was quoted as saying "In the future we aim actively to use national currencies in energy resources trade to settle... international trade accounts, with China and other counties.”
With the inter-connectivity of the global economy and banking system a move by one country is going to cause a reaction from another country. With all of the worlds currencies backed by nothing but a promise, the resulting movements in the currency exchange markets will be extreme.
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