It’s shaping up to be a bad week for currency markets in major Latin American economies.
Colombia’s peso, which hit an 11-year low against the US dollar earlier this week at 2737, continued falling late Wednesday.
By Thursday, it had dropped to 2806 pesos against the greenback.
Year to year, it has plummeted 54 per cent.
Brazil’s real, which has for two years struggled against the dollar, hit its lowest level in more than 10 years reaching 3.29 in March.
It improved somewhat – strengthening by less than one per cent between March and mid-June but began to slide again. This week it fell to 3.23 before settling at 3.285 at press time on Thursday morning.
Year to year, it has fallen by more than 48 per cent.
But the Brazilian real is also suffering from domestic fiscal policies which saw the primary surplus target drop from 1.2 per cent of GDP to just 0.15 per cent.
Brazilian markets fear that this could signal that the country will now receive a lower investment rating.
Mexico, Peru, Bolivia, Argentina and Venezuela have also suffered dramatic devaluation in the same period.
Analysts point to the strengthening of the US dollar, the stalling of the Chinese economy – and the waning of its appetite for importing goods, and the downward revision of growth in Latin American economies.
These factors contributed to a selloff in emerging market currencies, stocks and bonds and a flight to the dollar.
In South Africa, for example, the rand fell to 12.50 in early June. On Wednesday afternoon, it settled at 12.4460, but still far below its rate just last year. Since July 29, 2014, it has fallen 18 per cent.
Blame it on the Fed?
Currency depreciation has plagued many of the major Latin American economies since early 2014 when the Federal Reserve indicated it would end its quantitative easing stimulus program.
The extra cash in the US economy since the Fed began buying back bonds at a monthly rate of $85 billion allowed major conglomerates to shift investment to many emerging markets.
But in 2014 that started to change as major investment firms began to feel uneasy about the increasing volatility in emerging markets. In that year, some $15 billion of FDI flowed out of emerging economies and was redirected back into US and European markets.
The golden age of investing overseas was coming to an end, which did not bode well for emerging currency markets.
EPFR Global, a US-based firm that tracks the flows and allocations of funds domiciled globally, found that emerging markets between January 1 and February 1 of 2014 had suffered an outflow of $12.2 billion in equity.
But by the end of the second quarter in 2015, outflow was increasing.
Between June 3 and June 10 of this year, outflow from emerging economies reached $9.3 billion – most of it from Asia. This was the highest outflow total in seven years.
Several factors have been exacerbating the rate of outflow.
The euro has fallen by nearly 23 per cent since September 2014, making it cheaper to invest in Europe. At the same time, the Eurozone economy continues to grow at a dismal, lackluster rate which translates into lowered demand for Latin American exports.
By Firas Al-Atraqchi for The BRICS Post