By Andrew Rosenbaum and Bahattin Gonultas
ANKARA
Emerging market currencies and exports will be pressured by the weakened euro, after the Swiss National Bank’s decision to pull its support for the currency sent it into free fall.
“The SNB's actions on Thursday will likely prompt a revival of risk aversion,” wrote Kit Juckes and Alvin Tan, strategists at Societe Generale in a note released Friday. This affects all emerging markets which risk seeing capital flight as investors move to the dollar or yen as safe havens.
"Volatility, the dollar, the yen and gold are winners." Juckes and Tan said. They added that the euro, emerging market currencies, and Swiss exporters and tourist industry were losers.
- "Monumental development"
The Swiss National Bank Thursday announced that it would cease supporting the euro at the level of 1.20 to the Swiss franc. The bank had been dedicating about half of its reserves to supporting the euro, which had dropped by $0.20 against the dollar in the past six months.
"Increasing uncertainties in the Greek economy, and preparation for quantitative easing in the monetary policy of the European Central Bank made continuing support with euro purchasing impossible,” comments Swiss Banque Internationale de Commerce General Director Turgut Yuce.
“The Swiss National Bank's decision to remove support for the euro is a monumental development,” writes Christopher Vecchio, currency strategist at DailyFX.
“This came as a complete surprise. With the SNB's balance sheet having exploded to 100 percent of the country's annual GDP, the cost of maintaining the floor was too costly for the central bank. The first signs that the bank was struggling with the floor came on Dec. 18, when the bank first introduced negative interest rates as a way to deter speculators from betting on further Franc appreciation.”
The euro plunged by 30 percent on Thursday after the announcement, and has fallen further since.
“This move sees a major buyer of the euro leave the building and opens the way for further/faster euro weakness. There is a good chance that it will hit parity with the dollar in the near future,” Juckes and Tan continued.
- Challenges for emerging markets
The weakness of the euro has made investors turn to the dollar as a safe haven. Currencies slid across Eastern Europe and Latin America on Thursday and Friday, with the Polish zloty and the Chilean peso leading the declines.
"International risk appetite is falling as a result of the nature of Thursday's announcement," writes Deutsche Bank economist George Saravelos in a note released on Friday. "The negative impact on risk appetite is one of the most important side effects of this decision. First, the policy move marks a meaningful negative in terms of policy credibility: up until a few days ago the SNB had the 'utmost determination' to defend a currency floor, which has now been fully reversed."
“The SNB move is interesting as it suggests the bank expects the euro to go weaker, because of weak growth prospects for Europe. That suggests a more challenging export environment for developing countries that for which Europe is an important trading partner," Standard Bank emerging markets analyst Timothy Ash told AA on Friday.
"Export trading companies which are exporting to the Eurozone will be affected negatively by the weak euro," Ridvan Basturk, a research analyst at ALB securities in Istanbul, told AA. Turkish exporters, in particular, will be challenged as they take most revenue in euro, but pay costs in dollars, according to the Uludag Exporters Association.
But major European stock indexes rose two percent or more on the prospect that the European Central Bank was ready to begin its program of quantitative easing, and shares in emerging markets also rose. Borsa Istanbul was slightly higher at noon on Friday.
The European central bank’s stimulus program is intended to increase the money supply and thus to simulate growth. “The European Central Bank’s meeting will be very important for the global markets in next week. This meeting should be followed carefully by the markets,” said Ridvan Basturk, a research analyst at ALB securities in Istanbul.
The challenge that remains is that the euro is still dropping in value, and is likely to fall further if the stimulus announcement is made on Jan. 22 when the bank’s monetary policy committee meeting will be held. Continuing volatility in the currency markets does not bode well for emerging markets, particularly if conditions keep investors in “risk-off” mode.
