The Indonesian rupiah, Turkish lira, Brazilian real, South Africa’s rand and India’s rupee, known as the “Fragile Five”, are the new focus of global currency wars
Global economic actors including the IMF and the World Bank have recently been drawing attention to the recent downturn in the economies of developing countries, primarily those of the BRIC nations. Economists have revised their expectations for the Brazil, Russia, India and China (BRIC) group, significantly lowering their growth estimates for these countries. But a Deutsche Bank expert recently made another point, saying that it is really not BRIC that should cause concern, but the “Fragile Five” which include Turkey. The spectre of “global contagion” from Brazil, Indonesia, India, Turkey and South Africa is looming, Alan Ruskin, global macro strategist at Deutsche Bank now warns. The phrase “Fragile Five” is believed to have been coined by Morgan Stanley analyst James Lord in August. Since then, the phrase has gained increasing traction as a catch-all for the most concerning emerging market economies – which together represent around 7 percent of the world’s economy. Recent changes in the dollar have had a massive impact on the currencies of these emerging markets.
Fed money distorted growth in developing markets
As labor costs go up in deve-loping countries, coupled with a reduction in foreign investment and export figures as well as a slowdown in the economy, these nations become a source of increasing concern. Weak growth and high current account deficits are the common attributes of the Fragile Five. These are also the very properties that set off the alarm bells for investors.There will be general elections in four of the Fragile Five next year, adding to investor concern. The Fragile Five’s currencies saw a massive sell-off when it looked as though the Fed was going to gradually wind down its $85 billion monthly bond-buying program known as quantitative easing. The Fed’s quantitative easing measures have caused a distortion in the economic growth of economic markets, according to HSBC Chief economist Stephen King.
Strong drop in lira, makes it attractive
There has recently been a slight rally in these currencies, after the major sell-offs. But they are being watched closely. According to David Bloom, global head of foreign exchange strategy at HSBC, the Brazilian real is now a “buy today, sell tomorrow” story because of the likelihood that the rise in interest rates may hit the country’s economy.
The Indian rupee has caused concerns because the fall in its value has not been coupled with the expected change in its ba-lance of payments, as imports like oil are still expensive. And the Indonesian rupiah is concerning because it is relatively difficult to sell it, owing to administrative requirements brought in by the government, according to Bloom. But there are varying degrees of “fragility” among the five and investors should be wary of deciding to lump all of them into one strategy, Bloom warns. The South African rand and Turkish lira have already fallen far enough that they have reached a point where they are now more attractive, Bloom said. ” Still, worries about the “Fragile Five” are far from over.“ These currencies will face another sell-off if there is a further shock like the lack of tapering or another US shutdown,” Bloom warned.The situation of the “Fragile Five” demonstrates how central banks are sometimes less powerful in their own economy than the Fed, according Luis Costa, emerging markets currency strategist at Citi.
