Cash & Liquidity Management
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Dealing with the Currency Crisis

by Standard Bank

After the currency crises hitting the emerging markets in 1997-98 and 2001, there was a period of good, steady results from both income and equity markets, but even before the global crisis took hold in 2008 it was becoming evident that some emerging market economies were experiencing systemic problems. However, the general opinion was that the crisis would be confined to a few developed countries and that the markets in emerging economies would only feel a minimal impact.

As a result, currencies in emerging markets mostly strengthened before the crisis spread around the world, and those in the main emerging countries rose by an average of 4.8% against their base between the last quarter of 2007 and August 2008. But once trouble became global, emerging markets suffered major problems.

The reasons for this included exposure to bad or ‘toxic’ loan in the banking sectors of most of the developed countries, and the ‘easy’ money of the preceding years which had allowed mounting structural problems in several emerging markets such as Hungary, Ukraine and Argentina. The so-called credit crunch in mature economies saw many investors obliged to liquidate their positions in emerging markets, so that there was a  strong downward pressure on the value of local currencies. As a result of this all emerging market currencies with a flexible exchange rate weakened significantly in the six months following September 2008, although after that most of them began to rise, helped by central bank actions plus fiscal expansion under the aegis of the International Monetary Fund (IMF).

African currencies

The currencies of emerging markets in Africa have long been known to have their own special characteristics, which frequently prove baffling to other FX  dealers, particularly in North America and Europe. One of the leading operators in the region, South Africa’s Standard Bank, recognises that they have significant differences from the more recognisable G7 currency pairs, with a tendency to be considerably more volatile. The nominal CFA franc zone, the common currency of several countries in western and central Africa, swung wildly in the last months of 2008, depreciating overall by around 15% against the U.S. dollar. The South African rand was particularly affected  in October of that year, as investors sold off assets that they judged to be risky, although in fact the country had hardly  any exposure  to toxic assets, but the currency recovered sharply in the second quarter of 2009.