Brazil’s real worst hit in emerging market forex ‘bloodbath’

Emerging market currencies were hit hard on Thursday, with Brazil, Turkey and South Africa plumbing new lows against the US dollar on the back of growing pessimism over the outlook for the global economy.

Leading the way down was the Brazilian real, declining a further 1.2 per cent to R$4.22, its lowest since it was introduced in 1994.

The EM decline was just as notable in South Africa and Turkey, where the rand and the lira hit record lows, while Indonesia’s rupiah and Malaysia’s ringgit also tumbled.

Investor confidence has been draining from leading emerging countries for much of the past year as commodity prices have tumbled. But the trend has gained momentum since the US Federal Reserve flagged global concerns at last week’s policy meeting.

Structural and political problems also weigh on Brazil, Turkey and Russia, while China has been slowing, as illustrated by data this week showing a sharp contraction in manufacturing.

“Fundamentals for EM currencies are the worst in decades and this global bloodbath in EM FX will continue over the next weeks,” said Bernd Berg, EM FX strategist at Société Générale.

Brazil’s litany of woes, compounded by last week’s junk credit rating by Standard & Poor’s, have sent the real 6.8 per cent lower against the dollar this week as the currency finally weakened beyond the R$4.00 threshold.

Keeping it company in the LatAm region were the pesos of Colombia, Chile and Mexico, all down at least 0.8 per cent.

According to Citigroup rates strategist Luis Costa, the falls in the real and the rand did not amount to capitulation. “But it could evolve into that direction,” he said.

Several FX commentators had predicted the Fed’s decision last week not to raise interest rates would prompt a relief rally and a period of stability of EM currencies.

Peter Kinsella, EM strategist at Commerzbank, said all the Fed had achieved was to keep uncertainty and volatility at high levels “because we still don’t know how and to what extent they will hike rates”.

Noting that bid-ask spreads in many EM currencies were widening significantly, Mr Kinsella added: “It seems as though we’re seeing forced sellers who are willing to sell at almost any price.”

Mr Berg said: “Now people realise there is no fundamental reason for any EM FX rally and are forced to close their short US dollar positions initiated ahead of the Fed meeting.”

EM was in the grip of “a vicious downward circle”, he said.

Signs of central banks trying to take matters into their own hands are increasing. On Tuesday Brazil’s central bank began to auction $2bn of currency swaps, and analysts expect Mexico to extend a dollar auction programme it began in the summer to prop up the peso.

But the market remained unconvinced, with the real and peso continuing to fall. “You can get an idea of the lack of confidence in the authorities to control events by the way the market reacted to yesterday’s swap programme announcement in Brazil,” said Mr Kinsella.

Also intervening was Norway, Europe’s biggest petroleum producer, which surprised the market by cutting rates and signalled that further cuts were on the way. The krone fell more than 2 per cent.

Barclays said Norges Bank was showing its willingness to use stimulus “to compensate for a likely deterioration in economic activity driven by lower petroleum investments”.