2nd September 2013
Emerging market central banks have huge potential to intervene to support their currencies and the limited measures taken to date mean they have been biding their time argues Jan Dehn, Head of Research at Ashmore.
In a note published this week, he says that intervention has been remarkably limited so far, because emerging markets central banks:
1) have so far been comfortable with a measure of currency weakness
2) are now reaching the stage where they want to re-establish greater stability,
3) they may estimate that markets are reaching a technical position, where large scale intervention could be extremely potent.
Dehn argues that in terms of timing, there are wider considerations including the fact markets are still caught up in the summer doldrums and that a key meeting of the Fed’s Open Markets Committee is coming up on 18 September to decide the future of Quantitative Easing.
He adds: “We see no real danger of genuine crisis, because emerging markets have formidable capacity to control their currencies. The measures taken in the past week are merely a taster of the overall potential intervention powers. Cyclical weaknesses in a small number of larger emerging markets does not justify blanket selling across the entire universe of credits, particularly since the main reason for market weakness is technical, not fundamental.”
Considering the interventions to date, he says the most notable development in emerging markets in the past week was that central banks in the small handful of countries afflicted with macro-economic imbalances stepped up intervention. The increase in intervention followed further weakness in several currencies in the past week, especially in India. He points out that Brazil launched a USD 60bn swap facility and raised the Selic policy interest rate by 50bps to 9%. India produced a swap window for government oil importers. Indonesia also raised interest rates, launched a USD 12bn bilateral swap arrangement with the Bank of Japan, and shortened the withholding period for BI certificates thus encouraging more inflows from abroad.
He adds that it is widely expected that Brazil, China, India, Russia, and South Africa will reach agreement to create a pooled USD 100bn currency reserve fund by the time of the G20 summit next month.