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
"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,"
Emerging markets are under siege as the Federal Reserve pares its record stimulus measures and reports showing a slowdown in Chinese manufacturing raise concerns about the strength of their economies. A
The lira fell to a record 2.39 to the dollar and the rand tumbled to a more than five-year low of R11.3909 last month.
"Burning through their reserves, that's not sustainable,"
"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."
"Foreign exchange reserves can be thought of as a shock absorber at times of volatility, allowing emerging market central banks to buffer their currencies against sharp declines by supplying US dollars to the market," Goldman Sachs analysts
"Countries with low reserve cover are relatively more vulnerable."
South African policymakers unexpectedly raised rates by a half point to 5.5 percent on
"I wouldn't be short exclusively on the basis that they have little reserves,"
"If they don't start getting their act together, and if reserves continue to be depleted, then we're rapidly approaching a currency crisis. That thought is unsettling.''
Across the developing world, borrowing costs still were not high enough to protect the "weakest links" among emerging nation currencies,
"Vulnerable emerging markets face the risk of falling into a vicious circle," the strategists wrote. "Weaker growth and higher rates could weigh on local asset markets" and "if this then leads to unwinds, capital outflows could lead to renewed currency weakness, which would require higher rates once again".
The experience of
Mobius, whose firm manages
Blankfein said in a
Traders are paying a 6.99 percentage point premium for three-month options to sell the Argentine peso over contracts to buy, the most since
While the premiums for the lira, rand and rupiah have declined from recent highs, they're still above the average across emerging markets and higher than levels at the end of October. The gauge for the lira was at 3.95 percentage points, compared with 2.78 percentage points on
Ukrainian policymakers let the hryvnia plunge to a five-year closing low of 8.855 to the dollar on
Non-deliverable 12-month forwards for the hryvnia traded at 10.405 to the dollar on Tuesday, implying a 17 percent decline in the currency, according to data compiled by
Instead, officials have reduced fuel subsidies to cut the budget deficit and raised interest rates.
"Everyone is looking to bring rates higher,"
"It's the first step in calming the situation. You cannot continue using foreign reserves if no one believes in your policy." -
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