05-09-2018

Currency crisis has been spreading through emerging markets. The Argentine peso slumped to a record low after the Turkish lira’s plunge. Although Argentina’s foreign exchange reserves hit record high on January, its substantial foreign debt levels coupled with strong US dollar have increased investors’ concern over country’s ability to meet dollar-denominated debt payments due next year. Despite the fact that Argentina’s President announced a new austerity program, market capital still floods into USD denominated assets strengthening the dollar. Meanwhile, Argentina has requested an accelerated rescue package of 50 billion US dollars from the IMF. It is likely that the IMF will impose new austerity measures in exchange for the early disbursement of funds.

While a large trade deficit persists and oil imports are highly being relied on, Indonesia also suffers from the emerging market currency crisis. Indonesia’s rupiah sank to a two-decade low, speeding up the contagion of currency crisis amid emerging markets. It is also expected that the USD strength will persist as long as the prospects of higher U.S. interest rates remain, causing further pain to emerging market currencies and thus higher default risk. The impact caused by currency crisis to the global market growth is unavoidable due to its substantial reliance on emerging market. Investors are suggested to employ a defense strategy amid the current unstable market condition with capital outflow.

Reference list:
Bloomberg
HK Economic Journal
HK Economic Times

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