Emerging-Market Currencies Hurt by Oil, Metals

02:51 PM @ Friday - 31 October, 2014
Investors are losing appetite for currencies of emerging economies dependent on commodities as a price index of raw materials plunged to a five-year low led by a drop in crude oil and soybeans.

The CHART OF THE DAY shows a normalized index measuring exchange rates of 11 major emerging-market commodity producers fell 6.2 percent since the start of July through Oct. 29 as the Bloomberg Commodity Index of 22 raw materials slid 12 percent. In the same period, a gauge of 10 major developed-market currencies rose 2.3 percent.

“The love affair with emerging markets is over,” said Marc Chandler, the New York-based global head of currency strategy at Brown Brothers Harriman & Co. “Emerging markets produce commodities, and those prices are falling. That’s bad for Brazil, bad for South Africa, bad for Mexico and bad for Peru and Chile.”

Russia, the second-largest crude oil producer, has seen its ruble tumble 21 percent against the dollar since the start of July as oil fell 22 percent. In Brazil, the second-largest producer of soybeans and No. 2 holder of iron-ore reserves, the real weakened 10 percent. In Chile, the top producer of mined copper, the peso is down 4 percent as the metal slid 2.9 percent.

“Commodity prices are the key,” Chandler said in an Oct. 27 interview in Hong Kong. “You have falling commodity prices, rising U.S. interest rates and a slowing China as well. There were a lot of capital inflows and now they have outflows that will likely continue.”

Global investors have pulled about $6.5 billion out of emerging-market bond and stock funds since mid-September, taking outflows this year to $13.1 billion, according to research firm EPFR Global. The biggest fund withdrawals were from nations including China, Turkey and South Africa. Goldman Sachs Group Inc. in July joined other banks in calling an end to the so-called commodity super cycle, fueled in the past decade by surging demand from China.
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