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Renminbi touches 18-year low in EM currency rout

The relentless rise of the dollar scorched emerging market currencies on Thursday, sending China’s renminbi to its weakest level in eight years, while India’s rupee plumbed a record low.

Broad currency weakness against the dollar came as the bond market fully expects policy tightening by the Federal Reserve at its December meeting. Investors are also looking to next year and trying to gauge the extent of further Fed tightening under the proposed fiscal stimulus measures from president-elect Donald Trump.

A number of EM currencies fell to record lows or levels last seen during the Asian financial crisis of 1998 as investors rotate out of the sector into US assets, including stock markets, which traded around record highs into Thursday’s Thanksgiving public holiday.

Analysts said activity was reminiscent of the reaction in 2013 when the US central bank announced plans to trim its bond-buying programme, known as the taper tantrum, prompting investors to pull money from the bond market, sending yields on US debt higher.

“Emerging markets are suffering from a double whammy of higher US Treasury yields and a stronger dollar on back capital inflows to the US equity market,” said Koon Chow, a strategist at UBP.

“There is a huge temptation to anoint this as a second taper tantrum but the difference is that time around, we have the prospect of stronger US GDP growth driving up US yields and the dollar. The difference means stronger global commodity prices, which will be helpful for commodity producers in emerging markets. Outflows by retail investors from emerging markets are still in their early days.”

Among the major shifts seen across EM foreign exchange, the renminbi touched its weakest point since June 2008 for the onshore version of the Chinese currency, eating into its relative resilience against the dollar since November 8, when the result of the race for the White House became clear. It has fallen about 2 per cent against the world’s reserve currency since that date.

India’s rupee reached Rs68.8550 against the dollar, its weakest level on record. India’s currency has also been caught in the downdraft from economic disruption caused by prime minister Narendra Modi’s ban on high-value bank notes, a policy designed to cut corruption and reduce counterfeiting.

Malaysia’s ringgit was at its weakest point since the Asian financial crisis of 1998, down 0.5 on the day at 4.4675 ringgit per dollar. The Philippine peso also passed a milestone last seen then, hitting 50 pesos per dollar.

Mexico’s peso was down 0.4 per cent at 20.7303 to the dollar, some 3 per cent from its recent all-time low of 21.3942.

The Turkish lira fell to a record low of TL3.4185 before the country’s central bank raised rates for the first time since 2014. After the decision was announced, the currency rebounded to TL3.3855, leaving it down 0.2 per cent on the session and around 16 per cent weaker over 2016. The decision to lift the benchmark rate by 50 basis points to 8 per cent came in defiance of a repeated call from Turkey’s president, Recep Tayyip Erdogan, for lower interest rates in remarks he made ahead of the policy meeting.

Tom Kenny, senior analyst at ANZ, said: “There is little doubt that the Trump policy agenda of domestic reflation and negative views on trade/immigration is contributing to this exit of capital from EM.

“However, there are a number of other factors contributing to the sell-off, including unfavourable political developments in Malaysia and the Philippines and ongoing worries about Chinese capital outflows.”

Reporting by Peter Wells and Hudson Lockett in Hong Kong and Michael Hunter in London

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