Last updated:February 14, 2012 10:18 pm
EM central banks seek to stall rising currencies
Intervention is back. Emerging markets have seen the value of their currencies rise significantly this year as investors’ appetite for risk has improved. But that comes at a cost.
With stronger currencies threatening to harm exports, central bankers in emerging markets are beginning to take action.
After a five-month hiatus, Colombia and Brazil have started intervening to weaken their currencies.
Brazil’s central bank started buying dollars on February 3 after the real also rose 8 per cent in just five weeks.
Chile, meanwhile, has sounded a warning on the Chilean peso’s strength in recent days. With the central bank meeting yesterday, some investors are speculating that it could soon resume the daily dollar purchases that it made for most of last year.
The prospect of further intervention is starting to scare some investors off.
Joakim Diedrichs, a Latin American currency trader at JPMorgan in New York, says some have been taking profits in the real and the Colombian peso. “There’s no doubt that investors look at intervention and they would prefer to be in a market where the central bank is staying out.”
Some are scouring countries to find central banks with a more laissez faire approach.
Bernd Berg, analyst at Credit Suisse in Zurich, says shorter-term investors have been switching to Mexico, where intervention to stem the peso’s strength is viewed as unlikely.
Despite a rise of 9 per cent in the past six weeks, the peso is still below levels that were tolerated by the authorities last year.
However, central banks in emerging markets can usually only go so far.
Buoyed by the improvement in risk appetite, investors are chasing the preferable yields and growth potential on offer in comparison with the limp prospects of industrialised countries. “If you have a good story, the most you can hope to do is lean against the wind,” says Win Thin at Brown Brothers Harriman.
The desire for yield is one reason why intervention has been more prevalent in Latin American markets than those of Asia.
Asian bonds are yielding just more than 4 per cent, according to the regional component of JPMorgan’s global diversified bond index. Latin American bonds are yielding more than 6 per cent.
As a result, many Asian currencies are playing catch-up. The Philippine peso, the Singapore dollar, the Korean won and the Thai baht have all risen less than 3 per cent this year against the US dollar. The Mexican peso, the Brazilian real and the Colombian peso are up 9 per cent.
Still, investors are eyeing the Philippine central bank with caution after the peso outstripped most other Asian currencies this year. Brown Brothers Harriman says the central bank will step in to prevent the peso appreciating faster than its peers despite non-interventionist noises from officials.
Many emerging market central banks have a policy of constant intervention, ostensibly to smooth volatility and slow the pace of appreciation.
Peru intervenes every day and Chile intervened most days last year. While Brazil’s purchase of dollars this month was the first since July, it has been cutting interest rates recently.
However, emerging market central banks are just as likely to intervene to strengthen as to weaken their currencies. Last September saw a huge sell-off in emerging market equities and bonds as nervous investors repatriated assets from overseas amid jitters over the escalating eurozone crisis. That led central banks from Turkey to Peru to sell rather than buy dollars.
But emerging market central banks are still expected to allow their currencies to appreciate over time, allowing the focus of their economies to shift from a reliance on exports. As such, longer-term investors tend to brush aside the short-term effects of intervention.
“In order to get really concerned about intervention I think the central banks would have to become much more radical and aggressive in their approach but I don’t feel current levels really warrant this,” says Matt Cobon, an active currency manager at Threadneedle.
Copyright The Financial Times Limited 2012.
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