Emerging market currencies are getting hit by three secular trends all at once: the drop in commodities prices (for commodity exporters), the drop in global growth expectations and negative capital flows away from emerging economies.
The early August devaluation of the Chinese renminbi (CNY) on its own appeared relatively benign. However the combination of the nearly 2% devaluation with the above forces, the added political dimensions and the on-going uncertainty on Chinese GDP growth led to a spike in volatility across emerging market currencies.
In contrast to the fixed exchange rate band for the renminbi (CNY), the free-float South Korean won (KRW) provides a useful barometer of EM Asia currencies. We can see how the won (KRW) volatility term structure responded similarly to initial renminbi (CNY) devaluation. But contrary to the offshore renminbi (CNH), the expected volatility of the KRW has since risen further – signalling that market participants anticipate even more exchange rate volatility in the coming months.
Sam Valtenbergs – Mellon Capital, a BNY Mellon company