Rand remains 'vulnerable'

The rand and lira were focal points of the rout that ripped through financial markets last month.

new Mandela money

BANGALORE - The South African rand and Turkish lira will be the most vulnerable currencies in the event of another emerging market sell-off despite aggressive interest rates hikes from their central banks, according to a Reuters poll.

The currencies were focal points of the rout that ripped through financial markets last month when investors sold emerging market assets in expectation that the Federal Reserve will continue to gradually shrink its stimulus programme.

The lira has dropped 5 percent this year, hitting a record low of 2.39 on January 27, while the rand weakened 6 percent, prompting both countries' central banks to increase interest rates - in Turkey's case sharply.

Central banks in some other emerging markets have also raised interest rates to try to shore up their currencies.

Strategists in the latest Reuters foreign exchange poll said the biggest risk factors for emerging market currencies were the wind-down in US monetary stimulus as well as individual countries' current account imbalances.

In addition, signs of slowing Chinese growth coupled with looming elections in many emerging market countries this year will keep foreign exchange volatility high.

"It's easy to weaken a currency (but) difficult to strengthen it," said Christian Lawrence, FX strategist at Rabobank in London.

He said that the massive rises in Turkey's key interest rates last week, around double the already aggressive expectations in the market, were not all that large when put into context of similar rises from recent crisis history.

"In 1997 when Thailand was trying to defend its currency, it raised the three-day rate by almost 20 percent. We saw rate hikes up to 500 percent in Sweden (for a few days) in the 1990s in an attempt to support the currency. The bottom line is it rarely works," he said.

The lira and the rand took the spotlight from the Brazilian real, picked in a similar poll in August as the world's most vulnerable emerging currency. With over $375 billion in international reserves, Brazilian policymakers have defended its currency fiercely, which will likely prevent a sharp sell-off over the next 12 months.

Meanwhile the lira, which has lost about a fifth of its value over the past year, is expected to hit 2.25 to the dollar in a month before weakening to 2.27 in three and back to 2.25 in a year, according to the poll of around 30 strategists.

The rand will trade around 11.00 against the greenback in a month, 10.90 in six months and 10.80 in a year, after having lost almost 25 percent since the start of 2013.

But most respondents also tipped both currencies to be at the sharp end of any further exodus of funds from emerging markets.

"Clearly countries that have huge current account deficits and strong dependence on hot money flows, or portfolio flows, are the most penalised," said Roberto Mialich, forex strategist at UniCredit in Milan.


In the emerging economies with the biggest overseas financing needs - the 'Fragile Five' of Turkey, South Africa, India, Indonesia and Brazil - political risk has further spiced up the struggle for foreign cash.

All five face elections this year, adding to brewing local concerns over a deepening corruption probe in Turkey and the waning popularity of South Africa's leaders.

"The market might soften for a while but there is still some risk that close to the election date volatility might rise further," said Mialich, who was the most accurate forecaster in Reuters currency polls last year.

South Africa will face general elections in about three months, with President Jacob Zuma's ruling African National Congress looking to retain power in its toughest political test since the end of apartheid.

Aggressive rate rises aimed at reining in currencies also bring with them an economic price.

Higher rates are almost certain to slow growth, and weakening demand from China means it will be more difficult for countries to export their way out of trade imbalances.

"Even if the South Africa Reserve Bank raised rates further to stem the rand sell-off, the negative impact on the economy could outweigh the rand correction," said Anisha Arora, analyst at 4CAST.