The foreign exchange (FX) vulnerability index, designed by the Dutch Rabobank, measures how currencies move compared to volatility and put them in relation with economic data such as inflation, external debt to GDP and international reserves.
By the end of 2014, the index showed that Latin America was the most vulnerable area in terms of currencies compared to other emerging market countries in APAC and EMEA. The Brazilian real was regarded topped the ranking of the most vulnerable emerging market currencies, with Argentina, Uruguay and Mexico occupying three of the five following spots.
Foreign exchange vulnerability has not always been a serious concern for many countries, as depreciating currencies usually help to increase export and stimulate economies affected by low inflation. However, the weakness of Latin American currencies rang a bell because the drops have been in many cases so dramatic to highlight a consistent lack of control from the respective central banks. The economic problems underlying these depreciations are long-term oriented and not only related to external factors but also to internal issues and structural weaknesses.
Three external factors have acted as levers pulling down the Colombian peso, the Brazilian real, the Chilean peso and the Mexican peso. First, in 1H15 expectations grew that the US Federal Reserve would raise interest rates, generating a sustained dollar bull run. Second, commodity price falls hurt a number of commodity-based Latin American currencies. Third, China’s sudden devaluation of the renminbi in August spooked markets and caused emerging markets currencies to tumble sharply.
Latin American and other emerging markets currencies have appreciated notably since the end of September and the main drivers of this are, again, external factors. In fact, the market has decided to worry less about China, commodity prices experienced a rally and US rate rise expectations faded, sending the dollar down.
So Latin American currencies are on the rise but the impact is likely to be short term due to the structural problem in the economy remaining unsolved.The falls experienced in Latin American FX were consistent with the deterioration in other metrics such as terms of trade, balances of payment and growth, as well as a rising unemployment rate. Although the export is improving, the effect is not enough to counterbalance the drop in domestic demand.
Huan Ma
By the end of 2014, the index showed that Latin America was the most vulnerable area in terms of currencies compared to other emerging market countries in APAC and EMEA. The Brazilian real was regarded topped the ranking of the most vulnerable emerging market currencies, with Argentina, Uruguay and Mexico occupying three of the five following spots.
Foreign exchange vulnerability has not always been a serious concern for many countries, as depreciating currencies usually help to increase export and stimulate economies affected by low inflation. However, the weakness of Latin American currencies rang a bell because the drops have been in many cases so dramatic to highlight a consistent lack of control from the respective central banks. The economic problems underlying these depreciations are long-term oriented and not only related to external factors but also to internal issues and structural weaknesses.
Three external factors have acted as levers pulling down the Colombian peso, the Brazilian real, the Chilean peso and the Mexican peso. First, in 1H15 expectations grew that the US Federal Reserve would raise interest rates, generating a sustained dollar bull run. Second, commodity price falls hurt a number of commodity-based Latin American currencies. Third, China’s sudden devaluation of the renminbi in August spooked markets and caused emerging markets currencies to tumble sharply.
Latin American and other emerging markets currencies have appreciated notably since the end of September and the main drivers of this are, again, external factors. In fact, the market has decided to worry less about China, commodity prices experienced a rally and US rate rise expectations faded, sending the dollar down.
So Latin American currencies are on the rise but the impact is likely to be short term due to the structural problem in the economy remaining unsolved.The falls experienced in Latin American FX were consistent with the deterioration in other metrics such as terms of trade, balances of payment and growth, as well as a rising unemployment rate. Although the export is improving, the effect is not enough to counterbalance the drop in domestic demand.
Huan Ma