The new currency wars: central bank intervention to return
Emerging markets (EM) central banks are expected to step in to fight weakness in their currencies, as the correction in EM FX markets continues.
That is a radical shift from the old-style currency war in which EM central banks railed against ultra-loose monetary-policy stances of central banks in developed markets. That prompted a wave of currency intervention from EM central banks looking to weaken their currencies and help their export sectors, as investors from developed markets went on the hunt for yield. However, the spike in risk aversion – prompted by increasing concerns about the future of the euro and worries over global growth – has turned the tables, triggering position liquidation and putting pressure on EM assets across the board.
Benoit Anne, head of EM FX strategy at Société Générale, says the National Bank of Poland (NBP) tops the list of interventionist central banks, with the level of 4.40-4.45 in EURPLN likely to trigger a strong response from the central bank, which might help PLN stabilize after a serious correction in the past few days.
Anne says he continues to like PLN from a fundamental standpoint, given the strong growth picture in Poland and the hawkish stance of the NBP.
“However, the positioning risks over the past few days meant that the PLN was the worst performer in the region,” says Anne.
“NBP intervention would be the game changer that the PLN now needs to regain its status of outperformer in central Europe.”
PLN: waiting for the National Bank of Poland
Elsewhere in central Europe, the Romanian central bank is also likely to step in if there are further signs of risk to the RON.
Meanwhile, the Central Bank of Turkey is likely to watch the TRY against a basket, but the key levels for intervention in USDTRY lie just a few big figures away, around the TL2.10 to TL2.12 level.
In Latin America, Brazil, whose finance minister Guido Mantega coined the term currency war in 2010 and who was the most vociferous critic of ultra-loose developed market monetary policy, could also be on the verge of a U-turn.
“We would not be surprised if the Brazilian authorities were to change gear and start looking at defending the BRL, especially if we see a major break through the highly significant R$2.00 level [in USDBRL].”