Escalator up, elevator down. That’s the pattern in emerging markets and it is playing out as it has many times in the past. Markets in Eastern Europe and Latin America are taking the brunt of the selling now after a messy night in Asia earlier. Mexico and Brazil are hard hit, Iceland was is a mess and Russia opens and closes about as often as a typical traffic light turns from red to green. This is all part of the deleveraging process, compounded by fears of a global recession which will cut demand for commodities.
US investors, correctly forecasting sluggish US growth, poured money into emerging markets on the assumption that they had matured enough to break their reliance on the US as China soaked up resources. Maybe someday, but not today…As dollars flow home with their tails between their legs the greenback surges across the board, except against the Yen and Swiss franc which often were used to fund these trades as investors sought to exploit wide interest rate differentials.
Exacerbating the strong dollar trend is massive intervention from central banks to support their local currencies. Russia is reported to have sold $5 bln to defend the rouble today. To keep the Russian reserve basket in balance, about half of that will flow through EUR/USD as Russia sells Euros to maintain its 55% dollar/45% euro basket.