How is China’s Bad News Affecting Emerging Market Currencies?

By Lex Yaranu | Monday, August 24th, 2015

China worriesThese are not the best of times for emerging markets, but could turn out to be the sweetest period of the year for binary options traders. It looks like China’s woes are taking more of a toll than most people thought, and most of that till is being taken by emerging markets.

Yesterday, the news emanated from Kazakhstan that the central bank in that tiny nation had decided to allow its currency to float after spending so much in unsustainable attempts at pegging their currency, the Tenge.

After unsuccessful attempts at a controlled depreciation 24 hours earlier, the Kazakh Central Bank decided to allow its currency to float fully as China’s economic news took its toll, forcing the Tenge to plunge by 22% on Thursday August 20, 2015.

The Tenge is not the only emerging market currency that has been hit this week. The Vietnam Dong was also devalued while the Turkish Lira and South African Rand suffered hefty losses for the week. To underscore the significance of the losses suffered by the Rand, the ZAR has not hit the 13.0000 mark against the US Dollar since December 2001.

The origin of these currency shocks was the decision of the People’s Bank of China to devalue the Yuan for three straight days in a desperate attempt to cheapen Chinese exports and kept the Chinese economy on track to meet the 7% GDP target set by the central government earlier in the year. With cheaper exports, China which has historically competed with its Asian neighbors for a share of regional and global markets in certain industries like the textile markets, gained an advantage which countries like Vietnam, Malaysia, South Korea and Kazakhstan have been unable to match. Furthermore, the weakness of the Russian Rouble as a result of crippling Western sanctions has mean that exporting goods priced in costlier currencies against a market with a much cheaper currency has proven untenable.

Several emerging market currencies are already under severe pressure from collapsing oil prices: Saudi Arabia’s Riyal, the Nigerian Naira, Malaysian Ringgit, Egyptian Pound and the Ghanaian Cedi are under heavy pressure.

Similarly, copper producing countries such as Zambia and Australia which export most of their copper ore to China are facing severe pressure as the Chinese economy shows signs of not being able to meet the 7% GDP target.

These scenarios have all created a very interesting picture in the currency and commodity assets for binary options traders. It is left for traders to study the fundamentals and use technical entries to ensure the best possible plays that will end in profit.

Published in News & Analysis

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