“Painful days” await the currencies of developing countries


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A message similar to the message “we will go through a painful time to reduce inflation” in the speech by US Federal Reserve Chairman Jerome Powell in Jackson Hole came from European Central Bank (ECB) officials who spoke at the symposium on Friday. . Experts are of the opinion that the stable cessation of monetary expansion after the 2008 crisis will increase the pressures on developing country currencies in the coming period. However, emerging economies, which have begun to tighten their monetary policies alongside the Fed – even before the Fed – are estimated to be more prepared than in previous tightening periods. While the dollar index is moving towards 109 levels after Jackson Hole, a very strong rally is not expected in the Euro, which briefly saw above 1 with the ECB’s hawk message, due to the energy crisis. .

ING Bank Forex strategist Francesco Pesole thinks the stronger dollar after the Fed’s statements means more pressure on emerging market currencies. Pesole “The price of a hawk strengthens the dollar. That means more suffering for emerging market currencies, which have fallen by about 5 percent this year. “

In an analysis by the Wall Street Journal, it is reported that the foreign exchange reserves of developing and developing countries have melted by $ 379 billion since the beginning of this year to the end of June, according to data from the International Monetary Fund. The news notes that developing countries have been selling dollars from reserves at the highest rate since 2008 and it is estimated that “this increases the risk of waves of default in the more fragile economies.”

The strengthening of the “developers” with the Fed is more ready

Many emerging economies in Latin America and Asia started raising interest rates even before the Fed and tried not to lag behind the Fed in fighting inflation. Emerging economies, which tightened their monetary policies even before or in parallel with the Fed, have entered this cycle of tightening major central banks that began after COVID-19 and the war, according to an analysis by Reuters.

Turkey remains the exception

Turkey, on the other hand, continues to be an exception with its central bank, which has not initiated an interest rate hike despite inflation of more than 80 percent, indeed, in its last meeting it decided to cut by 100 bps. The TL, which lost 27% of its value against the dollar this year, is only 1% below the all-time high of 18.4 against the dollar.

“Exception in response to the Indian rupee yield curve”

Goldman Sachs expects about $ 30 billion of new capital inflows to India and an analysis on FX Street shows that the rupee is the only emerging currency to rise due to the inversion of the US Treasury yield curve. The Hungarian Forint, Singapore Forint, Korean Won, Brazilian Real and Mexican Peso are the currencies that have been most sensitive to this movement in the past when recession was priced into the yield curve. In the analysis, it is observed that the only rising currency between the Indian Rupee, the Malaysian Ringgit and the Turkish Lira trio, which is normally less affected by this movement, is the Indian Rupee.

100 bps increase expected by the ECB

Isabel Schnabel, of the ECB’s board of directors, stressed that more concessions will be needed this time to fight inflation than in previous tightening periods and said: “Growth and jobs may have to take a hard hit.” Furthermore, on Saturday Schnabel and French central bank president Villeroy de Galhau told Jackson Hole that monetary policy may have to remain tight “for a long time,” as Fed chairman Powell has done. According to Villeroy, he is of the opinion that the neutral interest rate will be between 1 and 2 percent, which will not cause contraction but will not lead to growth, and said that “this level will be reached by the end of this year. “. Villeroy also stressed that all the bank’s will and ability will be used to achieve the ECB’s goal.

The euro could start the week strong but …

This situation has reinforced expectations of a 100 bps increase by the ECB in the markets and the euro / dollar parity could start the week up with these expectations. Conversely, the dollar is expected to strengthen in the long term and a recession due to the energy crisis continues to put pressure on all European currencies, especially the euro.

“There is no pressure from old cycles on who develops”

Simon Harvey, Monex Europe’s Director of Forex Analysis, says Fed Chairman Jerome Powell’s speech is relatively in line with expectations. According to Harvey, the reason for the rise in EM currencies after Powell’s Jackson Hole speech is that the hawkish speech was in line with expectations. “They will try to lead the market to the idea that they will slow the rate of interest rate hikes, but they will defeat it with the idea that interest rates will stay high longer,” Harvey says. Noting that there is no pressure on emerging market currencies as in previous tightening cycles, Harvey said, “When US Treasuries are analyzed, we see more recession ideas being priced. However, we also see the idea that Fed policies will not put the same pressure on emerging market currencies, which are sensitive to the risk movement of bonds. Also, in 2022, when major central banks such as the Fed, ECB and Bank of England (BoE) began to tighten , emerging equity markets nearly wiped out all of their Jackson Hole earnings.

Bitcoin is less than $ 20,000, cryptocurrency volume is less than $ 1 trillion

Messages from the Fed and the ECB have brought a new wave of cryptocurrency sales, as in all risky assets. While Bitcoin has fallen below a major psychological limit of $ 20,000 again, the cryptocurrency market, which surpassed $ 3 trillion in 2021, has fallen below $ 1 trillion again. Bitcoin was last traded below $ 20,000 on July 14. Last week’s drop exceeded 7% in Bitcoin and 9.5% in Ethereum. The two most voluminous coins in the cryptocurrency market, Bitcoin and Ethereum, have lost 58% and 60% respectively since the beginning of the year.


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