Currency Crises

CEIC Gallery/Hot Topics/Global Database/Part 1 - February 11, 2016 Summary China’s slowdown, Federal Reserve’s policy tightening and commodity prices collapse unleashed sharp currency depreciation and capital flight in emerging markets and triggered the largest currency crises in Asia and Latin America in the last two decades. In order to protect the local currencies and avoid balance of payments crises, central banks in developing countries have been forced to increase interest rates, intervene on foreign exchange markets and impose capital controls. Over the last year China’s yuan has lost 5.7% of its value against the US dollar. Indonesia’s rupiah and Malaysia’s ringgit have depreciated by 10.4% and 21%, respectively, and are suffering the highest selling pressure since the peak of the Asian financial crisis in 1997-1998. Currencies of Brazil, Argentina and Russia have collapsed, while others such as Korean won and Chilean peso that have been considered safe until recently, have also depreciated due to commodity prices slump and China’s slowdown. Exports of developing countries has collapsed and foreign reserves have drained to historically low levels, threatening the financial and economic stability in these countries. CEIC’s Currency Crises provides insights on the recent developments and causes of the currency crises in key markets in Asia, Latin America and Europe. Besides the latest data and historical trends on foreign exchange rates against the major currencies, Currency Crises sheds light on the major aspects of the currency crises in developing countries, such as exchange rate market pressure, foreign exchange reserves and central banks’ monetary policy. Brazil 20 years after Brazil’s real put an end of decades of currency crises and hyperinflation in the country, it is again one of the world’s fastest falling currencies, bringing back memories for double-digit inflation and financial instability in Brazil. While emerging markets’ currency depreciation is a global trend due to falling commodity prices, strengthening US dollar and China’s downturn, the case with the real looks much deeper. Besides the external factors, Brazil’s currency is suffering from substantial domestic problems, such as government overspending and loss of investors’ confidence in the economy. After 4 years of free-fall Brazil’s real has depreciated by more than double against UD dollar. In September 2015, after Standard & Poors’ downgraded Brazil’s economy to “junk” status, the real dropped to 3.9 per USD, which was the lowest level since its introduction in 1994. Despite the country’s foreign reserves remain stable, exchange rate market pressure index (EMPI) indicates the highest selling pressure on Brazil’s currency since 1999. As a result of the considerable real’s depreciation, Brazil’s economy is already suffering from a double-digit inflation for the first time since 2003. Early Warning Indicators Early Warning Indicators is a dataset of economic indicators that provide early signals for currency crises and exchange rate market pressure on national currency. Dataset includes 18 standardized economic indicators grouped into three major categories - External Sector & Foreign Reserves, Interest & Foreign Exchange and Monetary Sector. Brazil First signal for a currency risk in Brazil came from lending rates. Real interest rate differential, the spread with US benchmark, increased substantially in Q1 2014. Lending rates increase in early 2014 widened the gap between lending and deposit rates. Brazil’s real interest rate differential also increased in 2014 reached 29.2% points in Q4 after 22.8% points in December 2013. Besides interest rates, two external sector indicators also warned for a risk of currency crisis. In Q3 and Q4 2014 short term increased to 14% and 16.2% of foreign reserves from 9.3% in 2014. Also, in Q4 2014 exports dropped by 20.3% on annual basis. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
11th February 2016 Currency Crises

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