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August currency review: another bad month for emerging markets

All of the weakest currencies during August (see the first table below) belonged to developing countries, as concerns grew about trade wars, especially between the United States and China, and better returns becoming available through higher US interest rates.

Those currencies which saw the greatest falls, however, belonged to countries where global worries were compounded by big domestic problems.

The Venezuelan bolivar 'fuerte' (VEF) was replaced by the bolivar 'soberano' (VES) two weeks ago. The move effectively meant a devaluation of 96% overnight and black-market exchange rates were (briefly) almost matched. However, the official rate has since been fixed against the dollar at a rate of USD 1 / VES 60, whereas rates on the black market have continued to depreciate (latest USD 1 / VES 87), meaning the official rate has again instantly become substantially overvalued. There are also serious questions about funding for the new currency and access to it at official rates. The likelihood is that the cost of living for ordinary people and expatriate staff working in Venezuela will still be governed by black-market rates far more than official ones. It is hard to see what has been achieved by the changes in terms of fixing the economic crisis. Certainly, the current hyperinflation will get worse.

Argentina's woes continue, despite a large bail-out agreed with the IMF and interest rates being raised to an astonishing 60%. The most recent falls in the peso's value came arguably because of bad communication by President Mauricio Macri, who went on YouTube to announce that he had requested faster disbursement of the IMF funds. By doing so he wanted to reassure investors that steps were being taken to arrest the slide, but the message was instead interpreted as a sign of panic, and the peso fell further.

The Turkish lira continued to fall heavily too and with few signs of effective measures being taken to halt the deterioration in Turkey's economy, capital flight was evident as investors fled for safer havens. When markets enter safety-first mode, nearly all emerging-market currencies can struggle at the same time. Authorities in both Hong Kong and Indonesia were in recent weeks forced to act to protect exchange-rate values, for instance. The worst-hit currencies in August are shown below:

Countries experiencing largest currency losses in August
Country
Currency code Movement v EUR
30 Jul - 3 Sep 2018 (%)
Inflation
(%)
Angola AOA -9 19.5
Argentina ARS -28 31.2
Brazil BRL -10 4.5
Lesotho LSL -11 3.8
Namibia NAD -11 4.5
Russia RUB -8 2.5
Sierra Leone SLL -8 16.6
South Africa ZAR -11 4.6
Swaziland SZL -11 4.9
Turkey TRY -27 15.8
Ukraine UAH -6 8.9
Venezuela VES -96 82766

Only the Pakistani rupee gained more than 3% against the euro in the past month, as the political situation settled down following a divisive general election.

Countries experiencing largest currency gains in August
Country
Currency code Movement v EUR
30 Jul - 3 Sep 2018 (%)
Inflation
(%)
Pakistan PKR +4 5.8

In other currency-related news, Iran has effectively re-legitimised its 'open market' for currencies, accepting that its April attempt to unify official and open-market exchange rates has failed. In fact, the effort almost certainly made things worse. The latest official rate is USD 1 / IRR 42 000 and the open-market rate stands at USD 1 / IRR 126 000 as of today, meaning the rates have diverged considerably in the months since the original reform. With the US due to re-impose sanctions against Iranian oil sales in early November, Iran's economy could be heading for serious trouble.

Finally, here is this month's selected-currency-movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 3 September 2018 v EUR since: Latest official annual inflation (%)
    30/7/18
(1 month)
4/6/18
(3 months)
26/2/18
(6 months)
4/9/17
(12 months)
 
Argentina ARS -28 -34 -45 -54 31.2
Australia AUD -2 -4 -3 -8 2.1
Brazil BRL -10 -10 -20 -28 4.5
Canada CAD 0 0 +3 -3 3
Chile CLP -5 -7 -9 -6 2.7
China CNY 0 -6 -2 -2 2.1
Egypt EGP 0 +1 +5 +1 13.5
India INR -3 -5 -3 -9 4.2
Indonesia IDR -3 -6 -2 -8 3.2
Japan JPY 0 -1 +2 +1 0.7
Kenya KES 0 +1 +6 +4 4.4
Korea Republic KRW 0 -4 +2 +3 1.5
Mexico MXN -3 +4 +3 -5 4.8
Nigeria NGN 0 0 +5 +1 11.7
Norway NOK -2 -2 -1 -5 3
Philippines PHP 0 -2 +2 -3 5.7
Poland PLN 0 0 -3 -1 2
Russia RUB -8 -9 -14 -15 2.5
Singapore SGD -1 -2 +2 +1 0.6
South Africa ZAR -11 -16 -20 -11 4.6
Sweden SEK -3 -3 -6 -12 2.1
Switzerland CHF +3 +2 +2 +1 1.2
Turkey TRY -27 -30 -40 -47 15.8
United Kingdom GBP -1 -2 -2 +2 2.5
United States of America USD 0 0 +5 +2 3
Venezuela VES -96 -99 -99 -99 82766
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