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Currencies fall on Argentina, Fed fears

Turkish lira banknotes are seen in this photo illustration taken in Istanbul.
Foreign investors shun taking risks

RIO DE JANEIRO — Emerging market currencies weakened for a second consecutive day yesterday as foreign investors become more averse to risk, scared by a looming forex crisis in Argentina and concerned about less monetary stimulus globally.

The Brazilian real initially slid more than one percent to as much as 2.4323 per dollar, its weakest intraday level in five months, while the Mexican peso slumped to a 1-1/2-year low of 13.6044. Losses in Latin America followed steep drop in the Turkish lira and other currencies in emerging Asia.

The real and the Mexican peso trimmed losses later, however, as investors took a less negative view about the possibility of regional contagion from Argentina, whose currency on Thursday plunged the most since the country's 2002 financial crisis.

“Unlike past episodes where devaluations sparked concerns over contagion, I'd argue that Argentina and Venezuela are largely viewed as outliers in the region today,” Morgan Stanley analyst Gray Newman said in a research note.

Argentina's official peso rate dipped 0.1 percent to 8.01 per dollar after slumping 11 percent on Thursday as the Central Bank, facing a 30 percent decline in its foreign reserves last year, apparently gave up on its efforts to smooth out the peso's depreciation.

In an abrupt policy reversal, the Argentine government said yesterday it would relax the currency controls it had long defended as essential, saying it believed the exchange rate had already reached “an acceptable level.”

Despite the morning sell-off in Latin American currencies, traders in Brazil did not identify sizable dollar outflows from the country yesterday. According to Central Bank data, US$837 million left Brazil during the first 22 days of the year, but inflows returned on January 21 and 22.

Although the possibility of financial contagion from Argentina is limited, a slump in the peso could pressure currencies of countries that have significant trade ties with Argentina.

“It may have some impact, yes, not through the financial channel but through trade. Brazil exports a lot to Argentina and vice-versa,” said Enesto dos Santos, an economist with BBVA bank.

Brazil's exports to Argentina totaled nearly US$20 billion in 2013, about eight percent of the country's total exports, according to government data.

“The real had been weakening faster than the Argentine peso over the past several years. If the peso devaluation is too sharp, I'd expect the real to depreciate to correct part of that difference,” Dos Santos added.

Highlights on FX reserves

The Argentine peso debacle, which has gained speed as the Central Bank seems to have run out of resources to keep supporting the currency, could also put pressure on currencies of countries with limited foreign reserves, analysts said.

“It is also plausible that the market is going to gun for emerging markets with insufficient reserve coverage,” Citi analysts Dirk Willer and Kenneth Lam wrote in a research note, highlighting the cases of Turkey, Indonesia and India.

“In our region it is Chile that does not score well on reserve adequacy, largely because reserve accumulation has been very poor,” they added.

Chile's foreign reserves, according to central bank data, stood at a little over US$41 billion at the end of 2013, not including the country's copper fund, worth about US$30 billion. Brazil, on the other hand, holds more than US$370 billion in reserves.

The Chilean peso slid to as much as 552.79 per dollar, its weakest since May 2010, but later trimmed losses to trade around 550.50, also pressured by concerns about the future of Chilean companies in Argentina.

“Argentina's decision hurts all companies with investments in the country ... as well as all the region's currencies,” said a Chile-based trader.” “Everything suggests the dollar will keep strengthening against the (Chilean) peso.”

Several Chilean companies, including popular retailers Cencosud and Falabella, have operations in neighbouring Argentina.

Concern that major central banks in the United States, UK and Japan will become less dovish more quickly than initially imagined contributed to sour investor sentiment toward emerging markets, said Steven Englander, global head of G10 FX strategy at Citi.

Ample global liquidity has fuelled investor appetite for higher-yielding, riskier emerging market assets during the past several years. But speculation that the US Federal Reserve may cut its bond purchases by another US$10 billion next week has sapped investor appetite for emerging market assets over the past few days.

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