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There are presently many different happenings all across the globe that are affecting emerging market (EM) currencies. A lessening demand for commodities, a devaluation of China's currency, stalled global trade, and an expectation that the Federal Reserve will increase interest rates are all bearing down on EM currencies. Some of the countries on the more drastic end of this are Russia, Colombia, and Brazil, whose currencies have fallen more than 30% over the past year, according to Bloomberg Business. Currently, emerging market currencies are in a "free fall" and according to Stephen Jen, a former International Monetary Fund economist, we should expect "a violent sell-off in some emerging market currencies in the second half of this year".
One of the most recent and talked about reasons for the downward pressure on EM currencies is the devaluation of the yuan in China. The devaluation has had an enormous effect on emerging markets and is currently putting massive amounts of strain on EM currencies. Many of the central banks in emerging market countries have started to take precautionary measures, for example widening the trading band, while others are playing the waiting game, being patient to see what China will do next. There is a more optimistic outlook on this event for EM countries. If the devaluation revives China's economy and the demand for commodities around the world, this incident could turn out to be a positive one for emerging markets. For a more in depth look at the yuan devaluation, and its impacts on China, check out our blog post: Is China's Yuan Devaluation Enough?.
There are many new worries that could trigger currency wars between emerging market countries. With a strong U.S. dollar and weak commodities, on top of the yuan devaluation, these are hard times for emerging markets. Through all of the mayhem weighing down on emerging markets, a recent study by Pew Research Center found that through it all people in emerging markets were more likely to say their economy is doing well opposed to those in advanced economies. If you want to learn more about emerging markets check out globalEDGE's emerging markets global insights section.
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