The Canadian dollar has fallen nearly 5% against the US dollar year-to-date and compared to emerging market (EM) currencies that decline is small. Of the 24 most traded EM currencies, only the Mexican Peso has managed to eke out a small gain against the greenback year to date, while several others are down 10% and (some much) more.
As many people and countries have learned, many times before, currency depreciation is painful when your expenses are in the rising currency and/or you have investments priced in the falling currency.
As shown in this table on left (from Picton Mahoney), over the past decade several EM countries have doubled their US denominated debt relative to their revenue (GDP), overdosing on U$ liquidity flowing from QE and the US Fed. As a result, now sharply rising debt costs leave fewer funds for everything else, along with higher default and bankruptcy rates, and a need to sell assets and raise cash.
Foreign investors also have a history of selling when the currency their assets are priced in plummets against that of their home base. So it’s no surprise then, that EM stock, debt and realty markets, have been following their currencies down, with the MSCI Emerging Markets Stock Index already nearly 20% below its January peak. A good start, but deeper price declines will be needed before risk-discerning capital is enticed to come in from the stability and optionality of cash-equivalents.
As usual, in highly levered and interconnected global financial markets, selling waves are unlikely to be contained in EM. With infamously misplaced consumer and investor confidence once more back near past cycle highs, the cash crunch and selling tsunami is likely to hit globally this time too. After buying and holding at some of the highest (least rational) valuations in market history, many will be washed off course once more. See No relief in sight as emerging markets tumble toward Bear Market:
