- Emerging financial markets will likely experience wide gyrations. Fluctuations should trace
extreme macro events ranging from financial rescue package relief to the on-going reality
of slower global growth. Although signs are surfacing that the unease in advanced economy money markets is beginning to dissipate, progress is hardly evident for Emerging Markets (EM) with some signs of serious strain in select nations. - The widely discuss USD Libor-Overnight Indexed Swap (OIS) spread in advanced economy money markets has provided an effective measure of stress in global macro conditions. The Libor-OIS spread has also served as a meaningful representation for the transmission of stress from advanced economy markets to EM via the evaluation of the premium on 6-month USD/EM non-deliverable forward (NDF) contracts of a composite of countries. The relationship provided a clear and unifying signal earlier in the Fall regarding the prospect for a sustained deterioration in EM. At present, the relationship between the Libor-OIS spread and NDFs appears to have broken down. In other words, Emerging financial markets remain under pressure despite the improvements in advanced economy money markets. This is clearly the case and reveals the following trends.
- First, the spillover of the international financial crises to the real economy is likely more
challenging for Emerging financial markets. Second, evaluation of the individual country components in the overall composite of NDFs most actively followed suggests that unique factors in Argentina and Russia are overwhelmingly influencing the overall picture. In contrast, China and Brazil have actually seen an improvement in NDF markets since the release of various financial packages coincident with the G7 meetings just one week ago. Interestingly, most countries have actually experienced a worsening of overall conditions since the mild improvement in advanced economy money markets. - Many Emerging economy central banks are meeting the deterioration in foreign exchange market conditions with active intervention. Intervention has in some cases helped to stabilize the exchange rate and certainly smooth fluctuations. Nonetheless, intervention should encounter limits in many cases.
- The risk to active intervention is that it could ultimately serve to weaken a central bank’s balance sheet and its currency. Institutions with limited reserves remain more vulnerable. They would include Romania, Israel, Hungary, Czech Republic, Mexico, Chile, South Africa, Poland, Venezuela and Turkey—all with foreign exchange reserves below four months of import coverage. So, Mexico, South Africa and Venezuela fall on both lists with their currencies remaining more vulnerable.
Emerging Market Strategy - Oct 26 2008
October 26th, 2008 · No Comments
Tags: Emerging Market Strategy
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