South African rand and Turkish lira: the Delicate Duo of emerging market currencies

If you’re a  South African on holiday or networking with business movers-and-shakers in the UK or Europe, it’s not fun converting what you are spending back into rands. On the other hand, tourists who fancy a game-watching holiday or spending time on a pristine beach, must be rubbing their hands in glee when contemplating their many leisure options in South Africa.

The South African rand has weakened and there’s no obvious sign it is going to strengthen any time soon. As the authors of this Reuters report note, a weaker rand may help the current account adjust.

Here’s the latest analysis on the five currencies that were the big losers of 2013. Aside from South Africa and Turkey, they are the currencies of Brazil, India and Indonesia. – JC

South African rand and Turkish lira: the Delicate Duo of emerging market currencies

LONDON, Jan 22 (Reuters) – The South African rand and the Turkish lira are becoming the Delicate Duo of emerging market currencies.South Africa's new banknotes, which features an image of former president Nelson Mandela on the front and images of the country's "Big Five" wild animals on the reverse, are seen in a till as they go into official circulation in Pretoria

During last year’s retreat from emerging markets, currencies of five countries – BrazilIndiaTurkeyIndonesia and South Africa – stood out for the magnitude of their losses. Their big balance of payments deficits and reliance on foreign capital earned them the collective moniker of the Fragile Five.

But as 2014 gets underway, the lira and rand appear to have broken away from the others, weakening further in contrast to the stabilisation in the Indonesian rupiah, Indian rupee and Brazilian real, the following graphic shows:

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The lira and rand have slumped 5-6 percent in the past month against the dollar while the rupee has risen 11 percent off last year’s record lows. The rupiah and real have recovered 1.4 percent and 3.8 percent respectively from five-year lows.

“It’s correct to say that there is differentiation between the Fragile Five based on how central banks are addressing the concerns of investors,” said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch.

“It’s fair to argue that IndiaBrazil and Indonesia have been more pro-active in addressing the concerns.”

Turkey shied away from raising interest rates again this week while South Africa has not stood in the way of rand weakness, betting it will help the current account adjust.

But Brazil has raised rates by 325 basis points since last April, while Indonesia has increased its benchmark rate by 175 bps since June and is expected to do more. India has unveiled a series of reforms and taken steps to cut its deficit.

“In India and Indonesia there has been some evidence of macro adjustment, the current account deficits are narrowing and that is not something we have seen in Turkey or South Africa,” said James Lord, a strategist at Morgan Stanley. (Reporting by Sujata Rao; Graphic by Vincent Flasseur; Editing by Susan Fenton)

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