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When global capital flows back into the local currencies of emerging countries, the local currency exchange rates of these countries fluctuate greatly! Foreign trade enterprises need to pay attention!

The concept of "Fragile Five" (Fragile Five) first appeared in 2013. It was proposed by economists at Morgan Stanley. These five countries are South Africa, Brazil, Turkey, India, and Indonesia. Morgan Stanley economists believe that these countries are too dependent on foreign investment, and the cost of borrowing is extremely affected by the Fed's withdrawal of QE. With the withdrawal of foreign investors, the local currency is under tremendous depreciation pressure.

"Nihon Keizai Shimbun" recently published a report entitled "Global Capital Return to the Local Currencies of Emerging Countries". The article pointed out that international capital is flowing to the local currencies of South Africa, Brazil and other countries known as the "Fragile Five. These countries have returned to the tone of appreciation after the collapse of their currencies against the dollar this spring. This is mainly because global quantitative easing has led to the inflow of capital with strong risk appetite into these countries, but some people are beginning to worry that the sharp appreciation of the local currency will have a counterforce.

On the Tokyo foreign exchange market on the 16th, the South African rand rose to 14.8 rand to the US dollar, the highest level since February this year. The exchange rate of the Brazilian real against the U.S. dollar rose to close to 1 U.S. dollar to 5 reals, and the exchange rate of the Indonesian rupiah also reached 1 U.S. dollar to 14000 rupiah, both the highest levels in half a year.

In the spring of this year, when the new coronary pneumonia epidemic began to spread, the rand against the dollar once fell to 1 dollar to 19 rand, the real exchange rate also once fell to 1 dollar to 6 reals, but now have stopped falling back. The Turkish lira and the Indian rupee show the same trend.

The stock markets of these countries are also improving. South Africa's FTSE/JSE index rose about 60% in mid-March, while Brazil's Sao Paulo Stock Exchange index rose 90%.

The first thing to mention is the trend of global risk appetite investment. The dust has finally settled on the U.S. presidential election, and some countries have begun to vaccinate their citizens against the new crown, with reduced uncertainty about the economic outlook playing a larger role.

Since March, the economic countermeasures taken by the governments of Japan, the United States and Europe and the large-scale quantitative easing measures implemented by the central bank have also had an impact. Stimulus policies have provided ample funds for the market, and interest rates in developed countries have fallen. According to Masahao Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, excess capital is shifting to investing in higher-yielding emerging country assets.

But the specific situation is different in different countries. The key indicator is the current account income and expenditure. If the current account balance continues to be in surplus, foreign exchange obtained through trade and services will need to be converted into the national currency, which will help the local currency appreciate.

In South Africa, where the appreciation of the local currency is strong, the current account surplus in the third quarter of this year reached 297.5 billion rand, much higher than market expectations. This is because, on the one hand, the price of platinum, South Africa's main export product, rose to a high of more than $1000 per ounce due to changes in risk appetite; on the other hand, domestic economic stagnation led to a reduction in imports. Brazil, once a current account deficit, has also turned to a surplus.

Turkey's current account, which has been relatively slow to recover its currency, remains in deficit. The tourism industry, an important source of foreign exchange earnings, is also facing a continued sharp decline in European tourists as a result of the persistence of the epidemic. Visitors won't come back until at least next spring, and it won't be easy for the Turkish lira to appreciate, according to Kota Hirayama, senior economist at SMBC Nikkei Securities who studies emerging economies.

The future of the vaccine is also unknown. Masahiro Ichikawa believes that the market's expectations for the new crown vaccine are too high. Once the effectiveness of the vaccine proves to be low, or if logistical problems delay the expansion of vaccination coverage, capital may flee emerging countries.

It was also pointed out that if the vaccine can be popularized in emerging countries, it may lead to the devaluation of the local currency of these countries. This is because economic recovery in emerging countries will stimulate import growth, which may lead to changes in the current account. In Hirayama's view, if there is a situation where the new crown vaccine is widely vaccinated only in developed countries, the local currencies of emerging countries will continue to appreciate, and then if the new crown vaccine is also widely available in emerging countries, the local currencies of these countries will face greater depreciation pressure.

For emerging countries that hold large amounts of dollar-denominated assets and bonds, the positive significance of local currency appreciation is greater, because a strong local currency will push up asset values and reduce debt burdens. If there is a momentum of reverse capital flows in the future, the headaches for these emerging countries may recur.

The Central Bank of Libya said on the 16th that in order to further implement economic reforms in Libya, it will adjust the exchange rate of the Libyan dinar against the US dollar.

The Central Bank of Libya issued a statement on social media that day that the board of directors of the central bank decided to adjust the exchange rate from the current 1.4 Libyan dinar to 1 U.S. dollar to the 4.48 Libyan dinar to 1 U.S. dollar. The statement said that the latest exchange rate will be officially implemented from January 3, 2021.

Since the overthrow of the Gaddafi regime in 2011, Libya has fallen into years of armed conflict and political turmoil, the economy is on the verge of collapse, and local banks are severely short of cash.

The Central Bank of Iraq issued a statement on 19 October, deciding to devalue the national currency, the dinar, by a large margin.

the central bank of iraq set the latest exchange rate on the same day at one us dollar to 1450 iraqi dinars. Previously, the exchange rate fluctuated at 1:1200. The central bank statement said the exchange rate adjustment was due to a liquidity crisis caused by low oil prices and the epidemic, which caused the government budget to face a large deficit.

Iraqi Finance Minister Ali Allawi said in a statement on the same day that Iraq's economic sector, including the exchange rate, is in urgent need of reform, and that this "difficult decision" will be an important step in resolving the crisis and safeguarding the Iraqi economy.

Iraq is highly dependent on the oil economy, with nearly 90% of the government's budget coming from oil revenues. Affected by the previous collapse in international oil prices, Iraq's oil export revenue has shrunk sharply, and the economy is facing severe challenges.

Keywords: foreign trade exchange rate