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Chart Of The Day: Emerging Markets Currency Wars Landscape

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This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

Table 1 allocates EMs to the various quadrants of the Swan diagram based on the latest data. The countries that lie in quadrant B (and thus need a weaker REER) include Egypt and South Africa (whose currencies have already weakened in recent months) as well as several economies in Emerging Europe. It is notable, however, that policymakers in these countries have yet to raise concerns over the strength of their exchange rates.

By contrast, those countries that have been more vocal in expressing concerns about Emerging Markets currency strength (mainly in Latin America) typically have a current account deficit and are operating at full employment (i.e. are in quadrant C on Chart 1).

Countries in quadrant D require a stronger REER to restore macroeconomic balance and tend to lie in Asia. We are particularly bullish on the Philippine peso. Finally, Hungary and Slovakia, which are the only two countries in quadrant E, need to reflate domestic demand to restore macro balance.

In short, this diagram is a useful tool to understanding the policy bind in emerging markets, though, granted, most developing economies, en route to economic convergence, tend to run current account deficits .

- Quadrant C highlights overheating risks and how, though weaker currencies might help, at its core, weaker demand is needed. What’s more, in many of these economies, a looser fiscal policy is needed just when it is, politically speaking, the least-desirable outcome amid growth concerns.

- If Quadrant C is accurate, then domestic demand is unlikely to power growth in the coming years because it is coming from a high base in recent years, cf. Brazil.

- Ukraine and Egypt clearly face a structural over-valuation FX challenge and are wisely seeking to talk up their currencies, while Mexico and Thailand are in the enviable position of boasting balanced economies.

Source here.


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