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Currency Clash towards Crash Emerging markets and beyond

January 21, 2016

Currency Clash towards Crash Emerging markets and beyond

by Lushfun


If anyone noticed foreign currencies are imploding.

Over the last year from January 2015 to January 2016

Brazil went from around 2.6 to 4.1 vs the dollar or losing around -37%

India went from around 61.5 to 68 vs the dollar or losing around -10%

Mexico went from around 14.6 to 18.6 vs the dollar or losing around -22%

Russia went from around 64 to 84 vs the dollar or losing around -24%

Euro went from around 1.13 to 1.09 vs the dollar or a loss of around -4%

Poland went from around 3.75 to 4.12 vs the dollar or a loss of around -9%

China went from around 6.19 to 6.58 vs the dollar or a loss of around -6%

Turkey went from 2.32 to 3.04 vs the dollar or a loss of around -24%

Why does any of this matter? There are several reasons that may apply to various countries mentioned above. Some of these reasons are straight forward others not so much.

Mortgage debt denominated in dollars while their earnings are in home currency.

Sovereign debt denominated in dollars while their earnings are heavily tied to trade.

Currency peg that is slowly weakened to modify the impact on financial system.

Remitances falling from population working abroad.


The problem with these and many others is not that there is a tie to the dollar. But the psychological behavior functions that formed that tied relative well being to dollar exchange. Purchasing power is in a sense becomes represented by how well the currency holds up to the dollar but generally that is secondary. What becomes primary is the striving idiocy for keeping YOUR share of revenue vis a vis the dollar larger in spite of the improbability of doing so. Ergo imagine a person whom bought an apartment in Warsaw say one year ago for $100,000 in Polish currency and that went lost 9% value not only is the anchoring to historical cost persist but every actor attached to that value is tied the same paradigm. The gov’t that collected higher taxes, the real estate agents that denominated vis a vis purchasing power derived from dollars, the wage given by companies employing people derived partly from possible rent, the bank valuing their loan book and reserves against it, and so on. Now consider for a moment the competition on the way up as people bid up assets and assume that bidding down people will be just as ruthless with those same assets they were bidding up. This is apparent in real estate markets in Moscow which already took severe punishment and will continue to do so for the foreseeable future.


Let us shift towards a certain reflection of where in the economy of said country these aspects will lead to the most damage. When one thinks about this and comes to a conclusion that the real economy people buying food, traveling, producing pipes and various goods, would most likely be the worst place for something like this to occur. So we see a heavy dose of inflation in all these goods in spite of weakening currencies because survival is paramount for millions if not billions of jobs and well being of nations.


The problem arises when there is a structural attachment via corporate debt or term loans that are essentially tied to trade balances via tourism or import/export and tied to the dollar. Here when a company bought inventory and that inventory devalued over a day or few weeks since the purchasing power of the population will not be able to deliver the amount of cash either in allotted time or by being unable to bid for products at all creates a severe strain on these companies and those whom financed them, as well as, the government in question. This is more or less what is occurring in Turkey. Timeline of maturities for various corporate and sovereign maturities is coming closer while the ability to refinance or pay them off is stretching out or becoming highly unlikely. Brazil is in a similar situation, although perhaps not as dire, yet.

Anchoring by government in these situations is the most destructive underlying force. Turkey can probably adjust easier since its’ problems are more obvious and the necessity to do something to fix them to adjust industry and salvage capital into productive use is paramount. Brazil on the other hand can have numerous impediments that marginally could bring on just as devastating results as multiple stake-holders from unions to taxation authority, to industry operations vie for whatever control they could impose and whatever capital they could grab onto, irrespective if it brings improvement longer term to the situation at large they all may be facing. It is harder to go against the structure where it seems to be simply a question of re-distribution rather than survival.

There are other aspects that I will revisit in the future in regards to this topic but for now that is all.


Be well


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