For differing reasons, the BRIC currencies have endured a tough time in recent days, which in turn has contributed to the firmer dollar tone.
India has seen its currency reach a new record low vs. the dollar, with weekly data showing further outflows from the domestic equity market. Having kept rates on hold earlier this week, the fear is that growth is set to slow further as the authorities struggle to contain inflation, which is currently running above 10%. Meanwhile, the Brazilian real has also suffered, with stronger inflation data pressuring the currency. Inflation is running at around 5% in Brazil, so real interest rates remain comfortably positive, with the policy rate at 8.50%. This has not helped the currency though, the real being the weakest of the main emerging-market currencies since the beginning of March, down nearly 17% against the dollar. Although it is at a record low vs. the dollar, the fall in the rupee over the same period has not been quite as steep, at 13%. Meanwhile, the Russian ruble is not far behind the real in the weakening seen over the same period. Recent softness can be aligned to the decline in the oil price, the correlation of the ruble to the oil price having increased for most of the year to date (currently -0.62 for USD/RUB vs. oil).
From the viewpoint of seeing the BRIC economies act as a counter-balance to weakness elsewhere, there is a case for welcoming currency weakness. But many, China included, have been working to reduce their reliance on exports, in part with the aim of creating a more stable economic cycle. Furthermore, in the case of a sharp global contraction, a reliance on net exports is more a curse than a blessing, as was the case for both Germany and China in late 2008 and early 2009. The BRIC economies grew more than 25% between 2008 and 2010 during a time when the G3 economies stood still. Despite the currency weakness, it’s unlikely that this level of de-coupling will be seen again, should the US and European slowdown turn out to be more sustained.
This article is contributed by FxPro. You can view the original article here
