When the Federal Reserve began its massive stimulus program, its low interest rate reduced the risk for yield-seeking investors. Speculators were able to borrow cheaply and invest in rapidly developing countries such as the BRICS where there were opportunities for higher returns. However as the US has started to recover, profits have become threatened leading many investors to unwind their carry trade positions and park funds back in safe havens such as the Dollar.
The Brazilian Real has lost nearly 15% of its value against the greenback since the beginning of the year, even after Central Bank of Brazil attempted to support its currency with three 0.25% increases in the interest rate. Inflation also remains a great concern for them.
In South Africa, the Rand has also suffered from inflationary pressures. The South African Reserve Bank has kept its benchmark interest rate at a 40-year low of 5% to encourage economic growth. Although its second quarter GDP is expected to have grown 3.3% year-over-year, the Rand has actually declined the most out of the BRIC currencies.
In Asia, the Indian Rupee has moved to record lows in recent weeks. As the Indian economy battles a growing current-account deficit and higher inflation, the Indian Rupee has seen little relief as many investors lose confidence in Indian assets. .
The Russian Ruble has declined the least in the same time period. However, second quarter GDP growth figures were below expectations. Slower momentum could lead investors to expect action from the Central Bank of Russia to encourage economic growth. The reserve bank has not changed its base interest rate in 11 months, which stands at 8.25%.
The only BRIC currency to appreciate against the U.S. Dollar is the Chinese Renminbi but there have always been arguments that the currency was undervalued due to manipulations by the central government to give China it’s export advantage.
Now back to the Pound which remained well supported yesterday after positive growth forecasts from the CBI. Sterling’s position against the Euro and the Dollar are presently GBP/EUR 1.1700 and GBP/USD 1.5670.
Posted in Daily Market News on May 30 2014