After months spent working to erase their image as emerging markets to avoid, the Iraq crisis and its influence on oil prices are putting the fragile five currencies back on investors’ sell lists.
Indonesia’s rupiah , South Africa’s rand (CME:T6N14), the Indian rupee (CME:H3N14) and Turkey’s lira (CME:E4M14) are the four worst performers of the 31 major currencies tracked by Bloomberg over the past month, while the Brazilian real (CME:L6N14) is little changed after three months of gains. Societe Generale SA and BNP Paribas SA recommend selling the lira, while Citigroup Inc. identifies the rupee and rupiah as the riskiest Asian currencies.
“We’re growing concerned about the situation in Iraq, which has the potential of undermining the performance of EM assets,” Benoit Anne, the head of emerging-market strategy at SocGen in London, said in a June 19 report. Oil (NYMEX:CLM14) “has become the main risk indicator for emerging markets.”
Morgan Stanley coined the term “fragile five” in August 2013 to describe currencies that are particularly vulnerable because of their dependence on foreign investment to fund current-account deficits. With most of their trade shortfalls made up of oil imports, the surge in Brent crude (NYMEX:SCN14) to a nine-month high would tend to affect these countries more than others and is causing the value of their exchange rates to tumble.
A Morgan Stanley analyst couldn’t be reached for comment on those currencies.
Oil prices have been climbing since early June as an al-Qaeda breakaway group known as the Islamic State in Iraq and the Levant seizes territory across Iraq, threatening to disrupt the supply of the second-largest producer in the Organization of the Petroleum Exporting Countries. South Africa, Turkey and India import 70% or more of their oil needs.
The crude oil rally has been tempered the past two days as Iraqi forces regained control of the Baiji refinery in the north from Islamist militants, and fighting hasn’t spread to the south, home to more than three-quarters of the country’s crude output.
U.S. Secretary of State John Kerry visited Baghdad this week to try to get political leaders to set aside sectarian divisions and confront the crisis, which he warned could engulf neighboring states including Jordan. Brent oil prices jumped to $115.71 a barrel on June 19, the highest since Sept. 9.
“Risks are higher for the fragile five, either through trade, inflation and fiscal links, or through a sentiment link,” Ju Wang, a Hong Kong-based currency strategist at HSBC Holdings Plc, said yesterday in an interview. “We did see the rupee and rupiah underperforming in a high oil environment. Both are likely to suffer from higher oil-import bills and increased inflation pressure. The lira probably also suffers from high commodity-import costs, but also is close to the Iraq turmoil.”
The rupiah led declines among major currencies in the past month, tumbling 3.2% and reaching a four-month low of 12,027 per dollar on June 18. Indonesia subsidizes fuel costs and higher oil prices may worsen the nation’s budget shortfall and current-account deficit. Malaysia is the only net exporter of crude in Southeast Asia, helping support the ringgit.
Brazil’s real has benefited from central-bank intervention and gained 0.2% in the past month, while the rand, rupee and lira fell from 2.6 to 2.8%. SocGen predicts Turkey’s currency will drop to 2.24 per dollar in the next three weeks, from 2.1298 today.