The Brazilian real’s dramatic drop has left the central bank with two options: jack up rates aggressively in one startling move, or tolerate higher inflation for longer.
If there is any silver lining for emerging market currencies after their thrashing in August, it is that they are probably now so cheap they don’t have much room to weaken any further.
G20 finance ministers and central bankers meeting in Istanbul will pledge to act decisively on monetary and fiscal policy if needed to combat the risk of stagnation, according to a draft communique obtained by Reuters last night. As has been customary at these summits, a lot of the discussion implicitly centres on Germany.
Alexis Tsipras is not for turning, not yet anyway.
Speaking in parliament on Sunday night the new Greek premier said he would not accept an extension to Greece’s current bailout, something the euro zone is urging him to do, and stuck with austerity-ending pledges such as giving free food and electricity to those who need it, reinstating civil servants who had been fired as part of bailout conditions and raising the minimum wage. Privatisations have already been halted.
The world’s major central banks have long followed the same general flight path, guided by the economic winds of growth, inflation and financial markets. It has worked pretty well for policymakers in the United States, Europe, Japan, and the United Kingdom: moving together to tighten or loosen monetary policy makes things more predictable for citizens, businesses and investors. It also serves as buffer to any volatile currency movements, at least among developed economies. But six years after the worst recession in decades, this could be the year central bankers split off and – with some risk – go their own way.
The last seven days has been a glaring example of fallout from the cross-border carry trade. That’s the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.
As China marks the third anniversary of the first ever bond sale by a foreign company denominated in renminbi, questions are rife on what lies next for the offshore yuan market.