Forget Turkey and Argentina. The Indian rupee’s real bugbear is the price of oil.
India’s currency had its worst month in three years in August as crude rallied on speculation sanctions on Iran will shrink global supplies. The crude import bill for the world’s fastest-growing oil user surged 76 percent in July from a year earlier to $10.2 billion. That pushed up the trade deficit to $18 billion, the most in five years.
“Dollar demand for crude heading into Iran sanctions is not helping with rupee pressures,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Demand for dollars is large, lumpy, and has been on an upward trend given the confluence of rising oil prices and actual demand pick-up for oil.”
The rupee is Asia’s worst-performing currency this year, sliding 11 percent and setting a string of record lows. On Thursday, it dropped past 72 a dollar, reaching a record 72.1050. The pace of the decline has analysts scrambling to revise forecasts, with Mizuho changing its year-end estimate to 70.50 from an earlier prediction of 68.80.
Brent, the benchmark of half the world’s oil including India’s, has jumped by more than 70 percent from a low set in the middle of last year. The commodity is trading at $77.45 per barrel, a whisker below a three-year high of $80.50 reached in May.
Rising oil prices will probably see India’s current-account deficit widen to 2.6 percent of gross domestic product this financial year, from 1.5 percent a year earlier, according to Australia and New Zealand Banking Group Ltd.
“With the rupee having reached our year-end forecast of 71.5, the question is how much lower it can go,” head of research Khoon Goh and strategist Rini Sen wrote in a note on Wednesday. “The currency is still on the expensive side” and current fair value is around 73 per dollar, which suggests it will weaken further, they said.
The rupee’s recent slide may have been exacerbated by month-end factors related to oil purchases, according to Commerzbank AG.
“Last week, there were reports of strong month-end dollar demand, which may have accentuated the rupee’s decline,” analyst Charlie Lay wrote in a research note published Monday. Commerzbank is in the process of revising its rupee forecast and will probably lower it, he said.
Weakness in the rupee has fueled speculation the Reserve Bank of India may revisit a policy employed in 2013 of opening a foreign-exchange swap window to meet the entire daily dollar requirements of the nation’s oil-marketing companies.
The RBI using this route will immediately remove about $600 million a day of demand from the foreign-exchange market, according to a note from Kotak Mahindra Bank. It will help reduce currency volatility but also push down reserves, it said.
For now, state-owned refiners Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Oil Corp. aren’t worried about central bank interference. The RBI hasn’t asked them to defer or stagger their dollar purchases for oil payments, an Indian Oil official familiar with the matter said last month.
©2018 Bloomberg L.P.
JPMorgan, BlackRock Warn Contagion Hitting Emerging Markets
• Ben Bartenstein
September 05 2018, 7:18 PMSeptember 06 2018, 6:14 PM
•
•
•
•
(Bloomberg) -- First came the Argentine selloff. Then Turkey. And before long, assets from South Africa to Brazil and Indonesia were getting hit in a selling stampede across emerging markets.
It’s a phenomenon that has a cadre of investors and strategists from JPMorgan Chase & Co. to BlackRock Inc. reaching for a single word: contagion.
The argument goes like this: while the asset class may offer value over the long haul, investors will sell relatively safe holdings to cover losses in more vulnerable markets or, worse, treat all emerging markets the same and sell indiscriminately. A herd mentality has taken over, meaning no matter what the relative risks and potential returns are in individual countries, investors who choose to buy run the risk of being trampled.
“We are having a confidence crisis in emerging markets, with some level of contagion being present,” said Pablo Goldberg, a money manager at BlackRock Inc. in New York. “With the short-term currency moves, it’s hard to jump in.”
Developing-nation currencies have slid to their weakest levels since May 2017, with the Argentine peso, Turkish lira and Indian rupee among those sinking to unprecedented lows in recent days, reinforcing the view that these aren’t merely idiosyncratic episodes. Indonesia’s rupiah hit its weakest since the Asian financial crisis two decades ago.
Global trade tension, a strengthening dollar and the prospect of more U.S. interest-rate increases led portfolio flows into emerging markets to slow to $2.2 billion last month from $13.7 billion in July, according to the Washington-based Institute of International Finance.
“That’s not a good story for emerging markets,” Anastasia Amoroso, a global investment strategist at JPMorgan Private Bank in New York, said on Bloomberg TV. “As long as trade wars are front and center and the Fed is hiking at a runaway pace versus the rest of the world, I think we are in an environment that argues for a stronger dollar.”
Buying Opportunity
Some investors have seen the selloff as an opportunity to buy on the basis of stronger fundamentals, such as easing inflation, trade surpluses and widening growth differentials between emerging and developed markets.
“One of the interesting things contagion sets up is a selloff in the weak and the strong,” said Arjun Jayaraman, who helps oversee $4.8 billion at Causeway Capital Management LLC in Los Angeles. “That’s when you have to step up and buy the strong currencies, the exporting, current-account surplus countries.”
Stocks from India, South Korea and Taiwan look attractive in this environment, according to Jayaraman. Amoroso said investors will eventually want to step into local debt, while Goldberg said he would prefer hard-currency sovereign debt if trade concerns ease.
One country proving resilient now was at the epicenter of the Asian crisis two decades ago -- read about that here.
Pressure on emerging markets will probably persist for now, with Turkey, Argentina, South Africa, Pakistan, Brazil and India among the weakest links, Wolfe Research strategists including Chris Senyek wrote in a note to clients. The New York-based firm said default probabilities in Asia, interbank lending markets in Europe and credit-default swap spreads from individual banks show some similarities with the 1997 emerging-market crisis, suggesting broader fragility in the asset class.
“Our EM ‘blow-up’ monitor suggests that weakness is spreading across the most vulnerable EM countries,” Senyek said.
Birthplace of Asian Crisis Becomes Haven in Emerging-Market Rout
By
Netty Idayu Ismail
September 5, 2018, 8:48 PM GMT+5:30 Updated on September 6, 2018, 11:48 AM GMT+5:30
•
Thai baht outperformed all emerging-market peers in past month
•
‘Substantial mega-crisis’ needed to weaken baht, Aberdeen says
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8604
NOMURA HOLDINGS
507.20
JPY
-3.30-0.65%
THB
Thai Baht Spot
32.7990
THB
+0.0080+0.0244%
Thailand, the birthplace of the Asian financial crisis two decades ago, has emerged as a haven from this year’s emerging-market rout.
The baht has outperformed every other developing-nation currency in the past month as the turmoil centered on Argentina and Turkey began to spread across emerging markets. Thailand’s large current-account surplus and foreign-exchange reserves, as well as a relatively low level of overseas ownership have cushioned any impact. Nomura Holdings Inc. and Aberdeen Standard Investments expect the currency to remain resilient.
There’s “low ownership, so little selling,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard Investments. “You would need a pretty substantial mega-crisis to trigger a sell-off in the Thai baht.”
The possibility that the Bank of Thailand will raise rates is “an added tailwind” for the currency, Nomura analysts, including Craig Chan, wrote in a report Wednesday. Policy makers will likely raise the benchmark rate to 1.75 percent by the end of the year, from 1.50 percent, according to the median forecast of economists in a Bloomberg survey.
The baht has strengthened more than 1 percent in the past month, while currencies from Turkey to India slumped to record lows as a rollback in U.S. Federal Reserve stimulus and global trade skirmishes dented demand for riskier assets.
The yield on Thailand’s 10-year government notes has risen 43 basis points to 2.77 percent this year, significantly less than the increase recorded by Indian and Indonesian debt, which have borne the brunt of the selloff in Asia. Thai bonds drew more than $5.6 billion in the first eight months of the year. Overseas investors were still snapping up the securities this week, even as local-currency debt in developing nations worldwide lost 0.9 percent.
In 1997, Thailand abandoned its policy of pegging the currency to the U.S. dollar as it lacked the reserves to support the baht against speculative selling. The move unleashed a wave of speculative attacks on other regional currencies and shook the global economy. More than two decades later, Thailand’s current-account surplus of about 10 percent of gross domestic product is attracting capital to the country.
India’s currency had its worst month in three years in August as crude rallied on speculation sanctions on Iran will shrink global supplies. The crude import bill for the world’s fastest-growing oil user surged 76 percent in July from a year earlier to $10.2 billion. That pushed up the trade deficit to $18 billion, the most in five years.
“Dollar demand for crude heading into Iran sanctions is not helping with rupee pressures,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Demand for dollars is large, lumpy, and has been on an upward trend given the confluence of rising oil prices and actual demand pick-up for oil.”
The rupee is Asia’s worst-performing currency this year, sliding 11 percent and setting a string of record lows. On Thursday, it dropped past 72 a dollar, reaching a record 72.1050. The pace of the decline has analysts scrambling to revise forecasts, with Mizuho changing its year-end estimate to 70.50 from an earlier prediction of 68.80.
Brent, the benchmark of half the world’s oil including India’s, has jumped by more than 70 percent from a low set in the middle of last year. The commodity is trading at $77.45 per barrel, a whisker below a three-year high of $80.50 reached in May.
Rising oil prices will probably see India’s current-account deficit widen to 2.6 percent of gross domestic product this financial year, from 1.5 percent a year earlier, according to Australia and New Zealand Banking Group Ltd.
“With the rupee having reached our year-end forecast of 71.5, the question is how much lower it can go,” head of research Khoon Goh and strategist Rini Sen wrote in a note on Wednesday. “The currency is still on the expensive side” and current fair value is around 73 per dollar, which suggests it will weaken further, they said.
The rupee’s recent slide may have been exacerbated by month-end factors related to oil purchases, according to Commerzbank AG.
“Last week, there were reports of strong month-end dollar demand, which may have accentuated the rupee’s decline,” analyst Charlie Lay wrote in a research note published Monday. Commerzbank is in the process of revising its rupee forecast and will probably lower it, he said.
Weakness in the rupee has fueled speculation the Reserve Bank of India may revisit a policy employed in 2013 of opening a foreign-exchange swap window to meet the entire daily dollar requirements of the nation’s oil-marketing companies.
The RBI using this route will immediately remove about $600 million a day of demand from the foreign-exchange market, according to a note from Kotak Mahindra Bank. It will help reduce currency volatility but also push down reserves, it said.
For now, state-owned refiners Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Oil Corp. aren’t worried about central bank interference. The RBI hasn’t asked them to defer or stagger their dollar purchases for oil payments, an Indian Oil official familiar with the matter said last month.
©2018 Bloomberg L.P.
JPMorgan, BlackRock Warn Contagion Hitting Emerging Markets
• Ben Bartenstein
September 05 2018, 7:18 PMSeptember 06 2018, 6:14 PM
•
•
•
•
(Bloomberg) -- First came the Argentine selloff. Then Turkey. And before long, assets from South Africa to Brazil and Indonesia were getting hit in a selling stampede across emerging markets.
It’s a phenomenon that has a cadre of investors and strategists from JPMorgan Chase & Co. to BlackRock Inc. reaching for a single word: contagion.
The argument goes like this: while the asset class may offer value over the long haul, investors will sell relatively safe holdings to cover losses in more vulnerable markets or, worse, treat all emerging markets the same and sell indiscriminately. A herd mentality has taken over, meaning no matter what the relative risks and potential returns are in individual countries, investors who choose to buy run the risk of being trampled.
“We are having a confidence crisis in emerging markets, with some level of contagion being present,” said Pablo Goldberg, a money manager at BlackRock Inc. in New York. “With the short-term currency moves, it’s hard to jump in.”
Developing-nation currencies have slid to their weakest levels since May 2017, with the Argentine peso, Turkish lira and Indian rupee among those sinking to unprecedented lows in recent days, reinforcing the view that these aren’t merely idiosyncratic episodes. Indonesia’s rupiah hit its weakest since the Asian financial crisis two decades ago.
Global trade tension, a strengthening dollar and the prospect of more U.S. interest-rate increases led portfolio flows into emerging markets to slow to $2.2 billion last month from $13.7 billion in July, according to the Washington-based Institute of International Finance.
“That’s not a good story for emerging markets,” Anastasia Amoroso, a global investment strategist at JPMorgan Private Bank in New York, said on Bloomberg TV. “As long as trade wars are front and center and the Fed is hiking at a runaway pace versus the rest of the world, I think we are in an environment that argues for a stronger dollar.”
Buying Opportunity
Some investors have seen the selloff as an opportunity to buy on the basis of stronger fundamentals, such as easing inflation, trade surpluses and widening growth differentials between emerging and developed markets.
“One of the interesting things contagion sets up is a selloff in the weak and the strong,” said Arjun Jayaraman, who helps oversee $4.8 billion at Causeway Capital Management LLC in Los Angeles. “That’s when you have to step up and buy the strong currencies, the exporting, current-account surplus countries.”
Stocks from India, South Korea and Taiwan look attractive in this environment, according to Jayaraman. Amoroso said investors will eventually want to step into local debt, while Goldberg said he would prefer hard-currency sovereign debt if trade concerns ease.
One country proving resilient now was at the epicenter of the Asian crisis two decades ago -- read about that here.
Pressure on emerging markets will probably persist for now, with Turkey, Argentina, South Africa, Pakistan, Brazil and India among the weakest links, Wolfe Research strategists including Chris Senyek wrote in a note to clients. The New York-based firm said default probabilities in Asia, interbank lending markets in Europe and credit-default swap spreads from individual banks show some similarities with the 1997 emerging-market crisis, suggesting broader fragility in the asset class.
“Our EM ‘blow-up’ monitor suggests that weakness is spreading across the most vulnerable EM countries,” Senyek said.
Birthplace of Asian Crisis Becomes Haven in Emerging-Market Rout
By
Netty Idayu Ismail
September 5, 2018, 8:48 PM GMT+5:30 Updated on September 6, 2018, 11:48 AM GMT+5:30
•
Thai baht outperformed all emerging-market peers in past month
•
‘Substantial mega-crisis’ needed to weaken baht, Aberdeen says
LISTEN TO ARTICLE
2:09
SHARE THIS ARTICLE
Share
Tweet
Post
In this article
8604
NOMURA HOLDINGS
507.20
JPY
-3.30-0.65%
THB
Thai Baht Spot
32.7990
THB
+0.0080+0.0244%
Thailand, the birthplace of the Asian financial crisis two decades ago, has emerged as a haven from this year’s emerging-market rout.
The baht has outperformed every other developing-nation currency in the past month as the turmoil centered on Argentina and Turkey began to spread across emerging markets. Thailand’s large current-account surplus and foreign-exchange reserves, as well as a relatively low level of overseas ownership have cushioned any impact. Nomura Holdings Inc. and Aberdeen Standard Investments expect the currency to remain resilient.
There’s “low ownership, so little selling,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard Investments. “You would need a pretty substantial mega-crisis to trigger a sell-off in the Thai baht.”
The possibility that the Bank of Thailand will raise rates is “an added tailwind” for the currency, Nomura analysts, including Craig Chan, wrote in a report Wednesday. Policy makers will likely raise the benchmark rate to 1.75 percent by the end of the year, from 1.50 percent, according to the median forecast of economists in a Bloomberg survey.
The baht has strengthened more than 1 percent in the past month, while currencies from Turkey to India slumped to record lows as a rollback in U.S. Federal Reserve stimulus and global trade skirmishes dented demand for riskier assets.
The yield on Thailand’s 10-year government notes has risen 43 basis points to 2.77 percent this year, significantly less than the increase recorded by Indian and Indonesian debt, which have borne the brunt of the selloff in Asia. Thai bonds drew more than $5.6 billion in the first eight months of the year. Overseas investors were still snapping up the securities this week, even as local-currency debt in developing nations worldwide lost 0.9 percent.
In 1997, Thailand abandoned its policy of pegging the currency to the U.S. dollar as it lacked the reserves to support the baht against speculative selling. The move unleashed a wave of speculative attacks on other regional currencies and shook the global economy. More than two decades later, Thailand’s current-account surplus of about 10 percent of gross domestic product is attracting capital to the country.
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