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Currencies Under Deeper Pressure From Rout In Commodities

Currencies Under Deeper Pressure From Rout In Commodities

The currencies of commodity-exporting countries have been struck by a bout of volatility lately, and are now jumping and falling in value on a daily basis in line with movements in the price of oil.

Russia’s ruble fell to an all-time low earlier this month as crude dipped below $30 per barrel. The ruble dropped to 82 rubles to the dollar on January 21, but has since clawed back some gains, with oil back up to $32 per barrel. A similar story is playing out for other currencies.

This week’s rally in oil prices has led to gains for Canada’s loonie and the South African rand, which were each up 1 percent on Tuesday. "The key driver for commodity currencies today is that oil is up 3 to 4 percent," foreign-exchange strategist at Bank of America, Ian Gordon, told Bloomberg. "Equities are also higher, which is also providing a boost to these currencies." Related: Only Recession Can Prevent An Oil Price Spike

But while many currencies have seen gains in recent days, they are still rebounds from near record lows. Canada’s dollar hit a more than 12-year low of C$1.45 per 1 USD. Mexico saw its peso depreciate to a low of 18.72 per 1 USD on January 21. Most currencies are still under fire, especially with crude oil having failed to sustain a rally so far. Over the past week, the currencies of Malaysia, South Korea, Thailand, and Indonesia all posted losses.

One country where the currency crisis is playing out worse than others is Azerbaijan. The capital city, Baku, was one of the world’s first petro cities. Oil has been extracted from Baku and its surrounding areas for more than a century.Today, more than 90 percent of Azerbaijan’s export earnings come from oil and gas exports.

But Azerbaijan is struggling with capital flight from its country now that oil prices have crumbled. Azerbaijan abandoned its peg to the dollar in December after coming under heightened pressure from low oil prices, a peg that became too difficult to hold onto. Letting the country’s currency – the manat – float was intended to avoid burning through cash reserves. The manat collapsed as a result, falling by one-third immediately after the central bank announced the move. Related: Oil Prices Down As U.S. Crude Inventories Hit 80 Year High

“The peg was no longer sustainable. Without action, foreign reserves would have been entirely depleted within six months at the current spending rate,” Livia Paggi, an analyst at risk consultancy GPW, told the FT in December. Azerbaijan exhausted 64 percent of its foreign exchange in 2015 in an effort to defend the dollar peg, according to Bloomberg.

Subsequently, the government imposed banking controls to stop capital flight. Protests have cropped up in the country because of rising prices, which are directly related to the plummeted value of the manat. But over the past week Azerbaijan shut down nearly one-tenth of the country’s banks for having failed to maintain required capital levels. The government shutdown 4 of the country’s 43 banks in the past week. Five to seven other banks may be merged in order to consolidate. Related: Rumors of OPEC-Russia Coordination Send Oil Prices Surging

Azerbaijan now only has about $5 billion in foreign exchange left. But it will require much less capital to defend the currency at its much weaker point. Moreover, Azerbaijan also has its sovereign wealth fund, which has an additional $34 billion of oil money stashed away. The state has been forced to tap that piggy bank in order to keep the manat from collapsing even further. "Azerbaijan's buffers are currently sufficient to defend the manat at its new level, if the government uses the assets of the State Oil Fund of Azerbaijan to do so," Krisjanis Krustins, associate director of the sovereign group at Fitch Ratings, told Reuters in an interview.

The pressure on currencies around the world has widened from just being about oil prices. The dollar has strengthened and the Fed has laid out a course of raising interest rates. Meanwhile, global growth is anemic, and the dollar is acting as a safe-haven, as capital continues to flow out from emerging markets. So the pressure on currencies is about much more than oil; it is also about fears over the state of the global economy.

But for commodity-producers, the pressure would ease if oil prices started to rise a bit.

By Nick Cunningham of Oilprice.com

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