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Following yesterday’s admission by the new head of Ukraine’s central bank of the considerable bank runs in recent days and the rapid dwindling of central bank reserves, Sergiy Kruglik – the director of international affairs for the bank – announced this morning that Ukraine has adandoned the dollar peg and will adopt a flexible exchange rate. The Hyrvnia collapsed through 10.00 on the news and is now trading 10.40 at record lows against the USD.
As The Economist notes, on February 7th the National Bank of Ukraine (NBU, the central bank) finally devalued the official rate of the hryvnya, to HRN8.7:US$1.
The policy was then to set the peg to the dollar roughly in line with trading on the interbank exchange. At the same time, the authorities introduced more foreign-exchange controls.
This has now changed and the currency is in free-fall. One cannot but think this is a desperate attempt to force the hands of a bailer-out to move before total chaos ensues (and of course, as the UAH plummets so import costs of energy will soar).
Russia’s earlier “default” warning (or threat) has not just impacted Ukrainian bonds but the currency is crashing. The Hyrvnia is down a stunning 6.8% today – the biggest drop since Feb 2009 – to a record low 9.8 to the US Dollar. This crisis is far from over and we would expect capital controls in 3…2…1…
With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed’s Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% – its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and “speculation” against its currency as drivers of the outflows (which will be “exhausted” by this devaluation according to the bank). The new level will improve the country’s competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all. The Kazakhstan stock index is up 12% on the news…
The tenge, introduced in 1993 after the breakup of the Soviet Union two years earlier, weakened the most against the dollar last month since July. Kazakhstan devalued its currency by 21 percent in February 2009, as the biggest energy producer in central Asia spent billions of dollars to support the economy and bail out its biggest lenders following the collapse of Lehman Brothers Holdings Inc.
“The devaluation was a surprise for many people, considering the central bank’s assurances that the exchange rate is stable,” Damir Seisebayev, director of the analytical department at ?? Private Asset Management in Almaty, said by e-mail. “But you have to be realistic. What is the tenge? It’s the ruble rate multiplied by five. This is a tested formula.”
The Kazakhstan Stock Exchange gained 12 percent after the announcement, data on the bourse’s website show.
So it must be great news, right? Just as Venezuelan stock holders…
“The move reflects a combination of factors, including the steady deterioration in the current-account position, worries over the impact of weak growth in Russia and the ruble’s managed depreciation,” Tim Ash, chief emerging-markets economist at Standard Bank Group Plc. in London, said in a note today.
“It is absolutely impossible to forecast” Ukraine’s exchange rate, BNP Paribas notes in an ominous report today. Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows – and these will be difficult to secure. The Hyrvnia has collapsed this morninng to 9.00 back near December 2008 lows as BNP warns “The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started.” Relying on external support amid a forced devaluation “increases risks of disorderly adjustement,” and that appears to happening.
Ukraine’s currency – the Hyrvnia has collapsed to 9.00 this morning…
BNP’s warnings today (via Bloomberg):
“It is absolutely impossible to forecast” hryvnia’s exchange rate, BNP Paribas analysts Serhiy Yahnych and Yevgeniy Orudzhev in Kiev write in report today.
Ukraine’s current-account gap, unstable funding and anti-govt protests have “created a dangerous Molotov cocktail, which now seems to turn into a currency crisis:” BNP
“The National Bank of Ukraine conducted only a minor intervention yesterday, which led to increased demand for dollars this morning:” BNP
“The NBU faces a difficult task: let the FX rate devalue to a ‘new fair level’ without triggering a run on hryvnia retail deposits, which might have already started. Furthermore, it is forced to conduct devaluation having no external support package, which increases risks of disorderly adjustement:” BNP
BNP comments seem extremely accurate from last year…
… rebalancing of the current account has been virtually zero over the last few months.
Considering Ukraine’s huge need to cover its current account deficit, the country is increasingly reliant on financial inflows. These will be difficult to secure
We expect FX reserves to nosedive to USD 18bn by the end of 2013, underlining the case for a weaker local currency. Ukraine badly needs to rebalance its current account, with calls for a more flexible (and weaker) FX rate getting louder.
With all eyes on Russia over the next month as the Sochi Winter Olympics ramps up, we are sure having the market’s attention on a collapsing currency is not what Putin had in mind before he dropped $50 billion to make it snow. While the Ruble remains just above record lows against the USD, Bloomberg reports that it has dropped to a record low against the central bank’s dollar-euro basket. Russia’s finance minister proclaimed today (Erdogan style?) that Bank Rossii should not raise rates (which has been unchanged at 5.5% for the last 15 months). Russian CDS is widening (193bps at 4 month highs) but not cratering like other EM currencies but MICEX (stocks) have had their longest losing streak since April.
As Bloomberg adds,
The ruble depreciated 1.2 percent to 40.9632 versus the central bank’s dollar-euro basket by 6:01 p.m. in Moscow. A weaker ruble encourages Russians to withdraw and convert local- currency deposits, Sberbank’s main source of funding, while hurting retailers by making imports more expensive in ruble-denominated prices.
“Investors are scared of the ruble devaluation,” Sergey Vakhrameev, an analyst in Moscow at AnkorInvest LLC, which manages about $30 million in assets, said by phone. “During strong devaluations, stock markets fall, investors become scared of indexes in countries where the devaluation isn’t controlled.”
Of course, this will only make the bank run problems worse…
This time, the Federal Reserve has created a truly global problem. A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets. But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible. This is causing currencies to collapse and interest rates to soar all over the planet. Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far. In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008. And all of this chaos in emerging markets is seriously spooking Wall Street as well. The Dow has fallen nearly 500 points over the last two trading sessions alone. If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.
A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens. But actually, right now just the opposite is happening and it is causing chaos all over the planet.
For instance, just check out what is happening in Turkey according to a recent report in the New York Times…
Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze. Just having enough money to purchase the basics is going to become more difficult.
And this is not just limited to a few countries. What we are watching right now is truly a global phenomenon…
“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”
So why is this happening? Well, there are a number of factors involved of course. However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis. A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…
Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.
But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.
“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.'”
What we are potentially facing is the bursting of a financial bubble on a global scale. Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…
If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.
I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.
And many smaller nations are being deeply affected already as well.
For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse…
Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.
“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.
Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness. If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.
Like I said, this is something that is happening on a global scale.
If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.
Hopefully something can be done to stop this from happening. But once a bubble starts to burst, it is really difficult to try to hold it together.
Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.
Was someone anticipating something?
Once again, hopefully this crisis will be contained shortly. But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.
And if you listen carefully, global officials are telling us that is precisely what we should expect. For example, consider the following statement from the finance minister of Mexico…
“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.
Yes indeed – it is looking like this is going to be a very volatile year.
I hope that you are ready for what is coming next.
UPDATE: The Argentine Trade Balance missed surplus expectations by the most in 3 years (and 2nd most on record).
As those who follow Zero Hedge on twitter know, we have recently shown a keen interest in the collapse of the Argentine currency reserves – most recently at $29.4 billion – which have been declining at a steady pace of $100 million per day over the past week, as the central bank desperately struggles to keep its currency stable. Actually, make that struggled. Here is what we said just yesterday:
The decline continues: ARGENTINA’S RESERVES FELL $80M TODAY TO $29.4B: CENTRAL BANK
— zerohedge (@zerohedge) January 22, 2014
As of today it is not just the collapse in the Latin American country’s reserves, but its entire currency, when this morning we woke to learn that the Argentina Peso (with the accurate identifier ARS), had its biggest one day collapse since the 2002 financial crisis, after the central bank stopped intervening in currency markets. The reason: precisely to offset the countdown we had started several days back, namely “an effort to preserve foreign exchange reserves that have fallen by almost a third over the last year” as FT reported.
As the chart below shows, the official exchange rate cratered by over 17% when the USDARS soared from 6.8 to somewhere north of 8.
But as most readers know, just like in Venezuela, where the official exchange rate is anywhere between 6.40 and 11, and the unofficial is 78.85, so in Argentina the real transactions occur on the black market, where they track the so-called Dolar Blue, which as of this writing just hit an all time high of 12.90 and rising fast.
What happens next? Nothing good. “The risk of capital flight is rising by the minute. This will be very hard to control,” wrote Dirk Willer, strategist at Citigroup, adding that liquidity had “largely disappeared” with a risk of Venezuela-style capital controls. Ah Venezuela – that socialist paradise with a soaring stock market… even if food or toilet paper are about to become a thing of the past.
Some other perspectives via the FT:
Siobhan Morden of Jeffries said: “This is not an administration that respects or understands market pressure. They have been in the early stages of currency crisis since December, and yet their main strategy has been to pay off arrears and try to attract foreign direct investment.”
Luis Secco, Buenos Aires economist, said “It is hard to figure out what is the logic behind the authourities decision to let the peso so abruptly, without any other accompanying macroeconomic policy. It’s possible that the authorities would rather see a strong rise in the dollar, than lose, again, a large quantity of reserves.”
“It is a potentially dangerous situation…not least because it could give the impression that the authorities don’t have a very clear idea of how to manage the situation.”
Ricardo Delgado, Buenos Aires economist, said on Wednesday: “The government faces a dilemma. It wants to stop reserves from falling. But that means less imports and thus lower growth, as the economy is very dependent on imports. So the question is: do you want more growth, or higher foreign reserves.“
However, with the “currency run” having once again begun, absent a wholesale bailout and/or backstop by “solvent” central banks of Argentina, a country which has hardly been on good speaking terms with the western central banks, there is little that the nation can do.
So for all those morbidly curious individuals who are curious what the slow-motion train wrecked death of yet another currency will look like, below is a link to the DolarBlue website, aka the front row seats where the true level of the Argentina currency can be seen in real time. If and when this number takes off parabolically, that’s when the panic really begins – first in Argentina, then elsewhere.
Of course, it’s not just Argentina – most of the world’s emerging market FX is getting hammered year-to-date…
As its Currency Collapses, India Doubles Down on Big Brother Surveillance | A Lightning War for Liberty
- Rupee may crash to 70 per dollar in a month: Deutsche (profit.ndtv.com)
- India in depth: Let rupee sink to save the economy (blogs.reuters.com)
- India’s currency is collapsing. Is it Ben Bernanke’s fault? (washingtonpost.com)
- Rupee could touch 70/USD in a month or so: Deutsche – Reuters India (in.reuters.com)
- Rupee hits life low of 64.54 despite RBI intervention – Reuters India (in.reuters.com)