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Foreign-exchange reserves are emerging as the latest battleground between traders and developing nations trying to stem the worst rout in their currencies since 2008.
Nations with the smallest reserves to fend off currency speculators will continue to see their exchange rates under pressure, options prices show. Of the 31 major currencies tracked by Bloomberg, traders are most bearish on Argentina's peso, Turkey's lira, Hungary's forint, Indonesia's rupiah and South Africa's rand, while the forwards market signals that Ukraine's hryvnia will fall 20% in a year.
"If you start to burn too quickly through your foreign reserves, it's an ominous sign — and of course in the forex market, they smell blood," Robbert Van Batenburg, the director of market strategy at broker Newedge Group SA in New York, said Feb. 5 by phone. "It creates this domino effect."
From Argentina to Turkey, emerging markets are under siege as the U.S. Federal Reserve pares its record stimulus measures and reports showing a slowdown in Chinese manufacturing raise concerns about the strength of their economies. A Bloomberg index tracking 20 exchange rates has fallen 2% this year, building upon the 7% decline in 2013.
Shrinking Stockpiles
Turkey spent 27% of its foreign reserves trying and failing to defend its currency since June, leaving it with $34 billion as of Feb. 10, excluding commercial banks' deposits. That's only enough to cover 0.29% of short-term debt, the least among 14 developing nations tracked by Goldman Sachs Group Inc. South Africa's $46 billion amounts to 13% of gross domestic product, less than the 18% it needs to finance its trade deficit and debt, according to the U.S. bank.
The lira fell to a record 2.39 per dollar and the rand tumbled to a more than five-year low of 11.3909 last month.
"Burning through their reserves, that's not sustainable," Viktor Szabo, a money manager in London at Aberdeen Asset Management Ltd., which oversees $10 billion, said by phone on Feb. 6. "People will be more than happy to short your currencies," he said, referring to a strategy of betting against an asset. "The pressure was there and there'll be more pressure."
Tenge Devaluation
Kazakhstan's central bank devalued the tenge by the most since 2009 yesterday after its international reserves dropped to about the lowest since 2009, while Argentina spent $25 billion since March 2011 defending the peso, driving the stockpile to a seven-year low. The peso has still weakened 16% in 2014.
"Foreign-exchange reserves can be thought of as a shock absorber at times of volatility, allowing EM central banks to buffer their currencies against sharp declines by supplying U.S. dollars to the market," Goldman Sachs analysts Robin Brooks and Julian Richers wrote in a Jan. 29 report. "Countries with low reserve cover are relatively more vulnerable."
Both Turkey and South Africa resorted to raising interest rates last month to deter speculators, which Citigroup Inc. warns may trigger a "vicious circle" of slower growth.
Turkey's central bank increased its benchmark rates to as high as 12% at an emergency meeting on Jan. 28, prompting a rally in the lira of more than 4%.
South African policy makers unexpectedly raised rates by a half-point to 5.5% on Jan. 29, a day before the rand fell to its low. Since then, the currency has rallied 2.8%, the best performance among 31 major currencies after the lira and Australian dollar.
