Forex

Analysis-Dollar drought haunts frontier economies

Published

1 year ago

June 29, 2023

Analysis-Dollar drought haunts frontier economies

© Reuters. Workers pick green tea at a plantation in Githunguri, Kiambu County, Kenya June 8, 2023. REUTERS/Monicah Mwangi

2/5

By Duncan Miriri and Marc Jones

NAIROBI/LONDON (Reuters) – As Pakistan spiralled into crisis this year, Wilson Muthaura pressed its government to put the tea Kenya’s KTDA co-operative produces 3,400 miles away on a list of essentials that would grant importers access to precious U.S. dollars.

His urgent lobbying reflects anxiety about a scarcity of dollars – the lifeblood of global trade – across emerging market and developing economies (EMDEs) that is impeding commerce and piling pressure on local currencies and sovereign debtors.

The World Bank estimates that one in four EMDEs have effectively lost access to international bond markets, a key source of hard currency needed to pay for oil and commodities like food.

It has halved growth forecasts for some economies hurt by the credit squeeze, the product of a global flight to safety as interest rates rose to combat inflation that surged last year when economies reopened after COVID and Russia invaded Ukraine.

Affected countries are also likely to see foreign direct investment being curbed, said Charlie Robertson, head of macro strategy at FIM Partners in London.

Without dollars from KTDA’s customers in Pakistan, its biggest market, the co-op that produces 60% of Kenya’s tea, would have struggled to pay its own bills.

“We were actually hit,” Muthaura said, explaining that KTDA had to rent extra warehouse space after sales slumped. Kenyan shipments of tea – its major export – have fallen by a fifth over the last year, according to the local regulator.

While customers usually pay up front and in dollars, “we had to resort to letters of credit with those buyers from Pakistan”, said Muthaura.

His efforts in Islamabad paid off, but KTDA is seeing similar strains emerging in Egypt, its second-biggest market, where three steep currency devaluations have raised worries about Cairo’s ability to service dollar debt.

The spike in global interest rates has already tipped Sri Lanka and Ghana into defaulting. Tunisia is teetering. Nigeria could soon be spending half or more of government revenues on interest payments. Even Kenya itself is seen at risk.

“Frontier economies are suffering from surging import bills exacerbated by a tightening of global financial conditions and a general flight to safety,” said David Willacy, a foreign exchange trader at StoneX in London.

BLACK MARKET

Although the dollar’s share as a global reserve currency has dropped to 59% from 70% over a decade, it continues to dominate global trade.

And because it is widely accepted and broadly holds its value, it remains strongly favoured among ordinary citizens in developing countries.

The emergence of parallel exchange rates or an unofficial market to buy dollars and other major currencies is often an early sign a country is running into problems.

“If I want dollars, I have to buy on the black market, which is expensive,” said Arouluwa Ojo, a student in Nigeria’s capital Lagos taking online lessons with a British university.

Africa’s biggest economy is a major oil exporter that sells its crude in dollars. But because it lacks refinery capacity, it has to import fuels, so hard currency is tight.

Nigeria has long had a web of multiple exchange rates which it is now trying to untangle, having also devalued its naira currency again last week.

Argentina’s recurring crises mean it has had parallel exchange rates for years, while in Cuba and Venezuela a mix of deep economic problems and U.S. sanctions mean dollars or euros are often needed to buy goods from medicines to meat.

With Cuba’s big foreign exchange earner, tourism, still recovering after the pandemic, a widening gap between those with and without access to hard currency is helping drive a record exodus of migrants from the island to the United States.

RESERVES BURN

A country burning through foreign currency reserves is another widely acknowledged sign of stress.

Specialist firm Chaucer, which provides political risk insurance, estimates that 91 of 142 countries have seen their FX reserves shrink in the last 12 months, over a third by more than 10% – a trend amplified by a rising dollar.

A plunge of around 70% in Bolivia’s reserves has spawned queues at banks and currency exchange shops as some merchants stopped accepting local currency.

“It is better for our clients to come with dollars, because with bolivianos it is not going to add up,” said La Paz TV salesman Ronal Mamani. “We don’t know exactly where the exchange rate is.”

Countries like Sri Lanka, Lebanon, Pakistan, Ukraine and Turkey have imposed capital controls, while Ethiopia, its problems exacerbated by civil conflict, banned imports of dozens of goods, including cars, to conserve money for food and fuel.

Some countries are trying to break or circumvent the dollar’s stranglehold.

Since Western sanctions cut Russia off from the global banking system, China and India have paid for Russian oil in other currencies, while Ghana is paying for oil with gold.

Brazil’s President Luiz Inacio Lula da Silva has floated the idea of a common currency for the BRICS group of emerging economies, saying in April: “We need a currency that gives countries more calm.”

The BRICS may discuss that proposal at a Johannesburg summit in August, although it is unlikely to become a reality soon. But the group is seeking closer ties with countries like Saudi Arabia as it positions itself as a counterweight to the West.

TRADE BOTTLENECKS

Dollar shortages are nearly always tied to worsening debt problems.

Echoing the World Bank, JPMorgan (NYSE:) calculates that 21 countries with a combined $240 billion of international debt are now effectively locked out capital markets – a near record.

International Monetary Fund chief Kristalina Georgieva said recently the lender is seeing more requests for aid, adding: “The IMF becomes the source of protection.”

In Africa, where the tough conditions attached to IMF loans have made some countries wary of relying on the Fund, politicians including Kenya’s president William Ruto have also argued for a trade payments system using local currencies.

“Why are we bringing dollars in the middle of our trade?” said Ruto, blaming dollar use for trade bottlenecks.

Argentina has said it will pay for Chinese imports in yuan. But China’s capital controls – and the unrivalled depth of U.S. financial markets – mean its currency is unlikely to challenge the dollar as a global force soon.

Forex

Asia FX rises as rate cut dents dollar; yen firms as BOJ holds course

Published

4 hours ago

September 20, 2024

Investing.com– Most Asian currencies firmed on Friday, while the dollar nursed losses after the Federal Reserve cut rates by a wide margin and kicked off an easing cycle.

The Japanese yen was among the better performers, strengthening after the Bank of Japan held interest rates and said it expected steady increases in inflation and economic growth.

The Chinese yuan also firmed after the People’s Bank of China kept its benchmark rates unchanged, ducking some expectations that it would cut rates to further support the economy.

Yen firm as BOJ holds rates, flags higher inflation

The Japanese yen firmed on Friday, with the pair falling 0.2% to 142.28 yen.

The BOJ in a unanimous decision, and said it expected inflation and economic growth to steadily increase.

While the central bank did not provide any overtly hawkish cues, its forecast of higher inflation tied into expectations that the BOJ will raise interest rates further. A slew of policymakers had signaled that rates will rise further in the coming months, especially as inflation picks up.

The BOJ decision and forecast came just hours after data showed inflation rose to a 10-month high in August, as increased wages pushed up private consumption.

While the yen was nursing weekly losses, it still remained close to its strongest levels for 2024, hit earlier in the week. Expectations of higher interest rates are likely to underpin the yen in the coming months.

Dollar weak after rate cut cheer offsets less dovish Fed signals

The and both fell slightly in Asian trade, extending overnight declines as markets looked to lower U.S. interest rates.

The Fed and announced the start of an easing cycle, which could see rates fall by as much as 125 bps by the year-end.

But Fed Chair Powell offered a less dovish outlook for medium-to-long term rates, stating that the central bank’s neutral rate will be much higher than seen in the past. His comments limited overall losses in the dollar, and had also seen the greenback appreciate in the immediate aftermath of the Fed decision on Wednesday.

Chinese yuan at 16-mth high as PBOC holds rates

The Chinese yuan firmed on Friday, with the pair falling 0.3% to its lowest level since May 2023.

Strength in the yuan came as the PBOC kept its benchmark steady, ducking some expectations that it would cut rates further to stimulate the economy.

The PBOC’s decision came even as a raft of recent economic indicators showed sustained weakness in China.

But media reports said the PBOC was instructing local banks to buy dollars and limit overall strength in the yuan, given that a stronger yuan also weighs on Chinese exports.

Broader Asian currencies firmed after the Fed’s decision. The Australian dollar’s pair rose 0.2% and was close to an eight-month high.

The South Korean won’s pair was an outlier, rising 0.2%, while the Singapore dollar’s pair fell 0.1%.

The Indian rupee’s pair fell 0.1%, pulling back further from record highs hit earlier this year.

Forex

Stay long on the yen amid rate hikes, improving growth- BCA

Published

4 hours ago

September 20, 2024

Investing.com– BCA Research said bets on a stronger Japanese yen were becoming more entrenched amid attractive valuations in local assets, the prospect of more interest rate hikes and an improving Japanese economy.

The yen saw a stellar recovery over the past two months, as a hawkish Bank of Japan, a weaker dollar and an unwinding carry trade pushed the currency to 2024 peaks. The pair had fallen as low as 139 yen in recent weeks.

BCA Research said in a recent note that the yen was a “high-conviction” buy, and that interest rates and global economic conditions were likely to favor the currency in the coming months.

BCA expects the BOJ to this week. But a “dovish hold” is an opportunity to accumulate more yen, while an unexpected rate hike is set to further boost the currency.

The research firm said the Japanese economy remained resilient, with increases in local wages helping spruce up private consumption.

With the Federal Reserve beginning an easing cycle, and with the BOJ likely to hike interest rates further, BCA sees interest rate differentials still moving in favor of the yen in the long term- more so if the global economy enters a recession.

BCA expects Japanese inflation to rise further in the coming months, tieing into the BOJ’s forecasts and giving the central bank more headroom to raise interest rates. The central bank hiked rates twice so far this year, ending years of easy monetary policy on expectations of an uptick in private consumption and inflation.

While the BOJ is expected to keep rates on hold in the near-term, especially with a looming leadership change in the Japanese government, it is still expected to keep raising rates by end-2024 and going into 2025. BCA said an interest rate hike will “not hurt Japan.”

On Japanese equities, however, BCA was less enthusiastic, rating them as “structurally neutral.” The firm cited yen strength as a headwind, and saw no immediate positive developments in ongoing corporate governance and structural reforms.

Forex

Dollar slips in choppy trading as traders grapple with Fed’s giant rate cut

Published

4 hours ago

September 20, 2024

(Adds missing “cuts” in first bullet, no other changes to text)

By Chibuike Oguh and Stefano Rebaudo

NEW YORK (Reuters) – The U.S. dollar slipped in choppy trading on Wednesday as markets grappled with the supersized 50 basis point interest rate cut, as well as the switch to an easing monetary policy stance delivered by the Federal Reserve.

Investor expectations had largely shifted towards a dovish outcome in the days leading up to the Fed’s move on Wednesday, with money markets pricing in around a 65% chance of a 50 basis point (bp) cut. But economists polled by Reuters were leaning towards a 25 bp cut.

“The interesting thing is the half point cut, which was pretty much unexpected or at least only half and half yesterday, has not really given the dollar extra damage – which is quite surprising,” said Joseph Trevisani, senior analyst at FXStreet in New York.

The , which measures the greenback against a basket of six peers, was down 0.38% to 100.64 after reversing gains made in early trading. It slid to its lowest in more than a year of 100.21 in the previous session.

The euro strengthened 0.4% to $1.1163. Against the yen, the dollar was 0.33% higher at 142.73 as markets anticipate that the Bank of Japan will leave interest rates unchanged on Friday.

The dollar weakened 0.08% to 0.847 against the Swiss franc and dropped 0.34% to 7.070 versus the offshore .

“What it’s really doing I think is giving permission, if you will, for the other central banks around the world, some of whom have started to cut rates already, to go further with their rate cuts,” Trevisani said.

Money markets priced in 72 bps of additional rate cuts in 2024 and 192 bps by September 2025.

The U.S. Treasury yield curve, which measures the gap between yields on two- and and seen as an indicator of economic expectations, steepened and hit its highest since June 2022. It was last at a positive 13.4 basis points, indicating more upcoming rate cuts.

Initial claims for state unemployment benefits dropped unexpectedly to 12,000 last week, according to Labor Department data on Thursday, suggesting labor market growth.

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026.

“The initial interpretation of the decision was that it was dovish and while it was basically even odds that it was going to happen, overall, on the surface, it’s still a dovish move,” said Eugene Epstein, head of trading & structured products North America at Moneycorp in Boston.

“Everything reversed basically by the end of the day, so you can make the argument as a bit of buy the rumour, sell the fact. A lot of dovishness was already priced in.”

The pound hit its highest since March 2022 versus the dollar after the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to keep rates on hold. Sterling was up 0.5% against the greenback at $1.3278 after reaching as high as $1.3314.

The Australian and New Zealand dollars drew support from domestic data surprises. Australian employment exceeded forecasts for a third straight month in August.

The was up 0.77% to $0.6815.

The , meanwhile, traded 0.58% higher at $0.6244, after data showed the New Zealand economy contracted by 0.2% in the second quarter.

Currency bid prices at 19

September 07:17 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 100.62 101.02 -0.39% -0.74% 101.47 100.51

Euro/Dollar 1.1162 1.1118 0.4% 1.13% $1.1179 $1.1069

Dollar/Yen 142.61 142.3 0.22% 1.11% 143.875 141.885

Euro/Yen 1.1162 158.18 0.64% 2.29% 159.96 157.79

Dollar/Swiss 0.8469 0.8463 0.06% 0.62% 0.8515 0.845

Sterling/Dollar 1.3276 1.3214 0.51% 4.37% $1.3314 $1.3155

Dollar/Canadian 1.3559 1.3606 -0.34% 2.29% 1.3648 1.3534