Central bankers across emerging markets are being forced into action to stem steep falls in their currencies, especially after China allowed its yuan to weaken to four-year lows this week.
A JPMorgan index tracking 22 emerging market currencies has hit successive record lows and with many analysts forecasting further yuan depreciation, more weakness likely lies for its peers.
Until recently, policymakers in the developing world, facing sluggish growth and shrinking exports, were relatively sanguine about currency weakness. That is still the case, but many now appear keen to prevent volatile swings or excessive declines that could exacerbate inflation and capital flight.
“Central banks may lean against the wind but they are not trying to arrest trends here. Going forward, in some markets with large hard currency liabilities and problematic inflation such as Indonesia and Turkey, FX weakness may force tighter monetary policy,” said UBS strategist Manik Narain.
The following is a list of measures emerging central banks have taken to limit currency weakness:
SOUTH KOREA – Authorities are estimated to have sold about $2 billion on Tuesday and again on Wednesday to slow the won’s decline against the dollar.
INDONESIA – Deputy governor Mirza Adityaswara said the central bank would be in forex and bond markets to guard the rupiah against volatility. Traders reported “heavy” interventions as the currency plumbed fresh 17-year lows versus the dollar. Reserves fell in July by almost $500 million, data showed on Aug 7.
MALAYSIA – International reserves have fallen below $100 billion due to central bank intervention to slow ringgit declines, data showed on Aug. 7. The currency is at the lowest level since before the government put a “floor” under it during the 1998 Asian crisis. Reserves are down $10 billion since end-May and $20 billion this year to five-year lows.
GEORGIA – raised interest rates by 50 basis points on Aug. 12 to control inflation and support the lari currency, which has lost 20 percent so far this year against the dollar.
MEXICO – Governor Agustin Carstens has said interest rates could be raised any time to defend the peso, which is at record lows. The central bank has also bolstered interventions, raising daily dollar auctions to $200 million from $52 million.
NIGERIA – sold $80 million to bureaux de change on Aug. 12 at a naira exchange rate of 197, boosting the currency on the parallel market. It has started to sell dollars twice weekly, the head of Nigeria’s bureaux de change association told Reuters. Earlier it directed commercial banks to pay for dollar purchases 48 hours in advance, after it curbed access to the interbank currency market to preserve foreign reserves.
UGANDA – raised rates by 150 basis points to 16 percent on Aug. 10, saying the shilling’s depreciation posed inflation risks. Rates have been hiked by 500 bps since April.
KENYA – has been mopping up shillings from money markets. The resulting tight liquidity makes it expensive to hold dollars. It has raised interest rates by a total 300 basis points since June but defied expectations of a 50 bps hike last week.
BRAZIL – said it would nearly double the number of currency swaps to roll over expiring contracts to support the real , currently at 12-year lows. The bank raised rates by 50 basis points on July 29 to 14.25 percent and plans to hold them there “for a sufficiently prolonged period”.
RUSSIA – has stopped its dollar purchase programme and will not replenish its reserves for the rest of 2015 to reduce pressure on the rouble. On July 31 it cut interest rates by 50 basis points (bps), its fifth cut this year but smaller than its usual installment of 100 bps.
TURKEY – The central bank said it may adopt additional forex liquidity measures if currency moves continue to delay the fall in inflation. Governor Erdem Basci also signalled a return to more orthodox monetary policy, saying the bank was conducting a technical assessment of the impact of using a single interest rate.