Small Moves on Monday, But Charts Still Ominous

The moves in the EM currencies the market is currently most focused on have actually been fairly small on Monday – however, when looking at the charts, one cannot help thinking that they are merely consolidating ahead of the next major move. For instance, the Argentine peso and the South African Rand have built triangles in recent days, which more often than not tend to be continuation formations. The Turkish lira has also failed to find any new fans and has formed a symmetrical triangle as well on the daily chart (a somewhat steeper sloped one).

Of course there is no guarantee that these triangles will actually turn out to be continuation formations. It is just something that has a fairly high probability per experience.

The Argentine peso vs. the US dollar daily (official rate) – building a triangle – click to enlarge.

The Rand-dollar rate: here too a triangle is visible on the daily chart. Due to the last minute pullback in January, Rand-dollar is at a new closing high for the move on the monthly chart – click to enlarge.

The Turkish lira vs. the dollar – yet another symmetrical triangle – click to enlarge.

Argentina Most Likely to Go off the Rails

The 'blue peso' (Argentina's black market rate for the peso, depicted in red below) has also pushed higher again following a brief respite a few days ago:

There is still a wide gap between the official and the black market rate of the peso - click to enlarge.

One reason why we are focused on the peso is that Argentina's government is the one that seems most prone to making additional mistakes. It appears that the Kirchner administration is clueless as to what to do next. If the plunge in the peso continues as a result, it is likely to affect other EM currencies through contagion effects. A few excerpts from a recent article in the Guardian illustrate the government's aimless flailing about:

“Scrambling to protect the country's perilously low central bank reserves, which dropped 30% last year and fell below $30bn (£18bn) this month, the government of President Cristina Fernández de Kirchner seemed at a loss how to proceed.

It started the week introducing tight controls on the purchase of online goods from abroad, to prevent Argentinians from spending dollars in ever larger quantities – especially on Chinese products which, as a result of 30% inflation, can be cheaper delivered to their door from abroad than bought at local stores.

[...]

The dollar freeze paralysed the property market, which operates in dollars, but failed to stem the rush away from the peso. Instead it created a black market where the dollar has risen from eight to 13 pesos in the last year while the central bank continued using – and losing – reserves trying to keep the dollar in check. Its battle was ultimately lost this week in view of the peso's sudden collapse.

Seemingly oblivious to the country's economic plight, Fernández has referred to the last 10 years – since her husband assumed Argentina's presidency in 2003, and she took over in 2007 – as the "victorious decade".

[…]

“There's no plan, the president is out of touch with reality, she's lost like Alice in Wonderland," says Ender, who has had to move out of her apartment, where she has had no water, no working lift and no refrigeration since 16 December. Her plight is shared by thousands of neighbours and even hospitals, in the middle of unusual summer highs of close to 40C.

Economic observers blame the government's populist policies – including keeping utility prices artificially low to disguise inflation – for the power crisis. They say this has made it impossible for firms to invest in maintaining power lines. The government denies the charges and says that inflation is fuelled by anti-government businessmen.

[...]

Major announcements are left to her [Kirchner's, ed.] cabinet chief, Jorge Capitanich, another official who has been linked to alleged corruption, and economy minister Axel Kicillof, who is said to be behind the plan to let the peso lose value without officially announcing a devaluation.

"The government is at a stage of dangerous improvisation," tweeted former central bank president Martín Redrado, who was fired by Fernández in 2010. "These measures generate only more paralysis and uncertainty."

(emphasis added)

This is not exactly a confidence-inspiring situation to put it mildly. Blaming unnamed evil businessmen for the country's woes seems to have been copied from Venezuela, and the same goes for various measures that have recently been introduced, such as price controls.  As Bill Bonner recently pointed out, economy minister Axel Kiciloff is best known for having 'reinterpreted Keynes from a Marxian perspective' in his previous academic career. Somehow we doubt he will come up with a viable solution to Argentina's troubles.

A Few Words on Turkey

Turkey's central bank has certainly shown some intestinal fortitude by raising rates as much as it did, although its actions could also be seen as an act of sheer desperation. However, be that as it may, prime minister Erdogan is already busy undermining its authority by expressing his displeasure with the move, in the process making up new economic theories:

“First, Prime Minister Recep Tayyip Erdogan criticized the bold move by Turkey’s central bank this week to raise interest rates sharply to halt the decline in the country’s currency, telling reporters that higher borrowing costs would lead to inflation — an argument that contravenes accepted economic logic.

Mr. Erdogan’s economic adviser, Yigit Bulut, then did little to reassure skittish investors, suggesting that the prime minister would do something that would be “very positive for the markets,” but did not say exactly what Mr. Erdogan’s plans were.

The remarks only added to jitters in financial markets, which have battered the Turkish stock market and in recent weeks sent the currency, the lira, to historic lows. While Turkey has suffered along with other developing nations from the “tapering” of bond purchases by the United States Federal Reserve and the threat of rising global interest rates, its problems go beyond that to basic questions about the stability of the government and its ability to grapple with the economy’s problems.”

(emphasis added)

OK, full stop – it has probably very little to do with the Fed's 'tapering'. We don't know who made this canard up, but it certainly sounds like an excuse. The countries that have seen currency troubles all suffer from large balance of payment deficits and domestic credit and asset bubbles. It could well be that 'tapering' is used as an excuse by the sellers of their currencies and assets as well, but this is a case of correlation not necessarily proving causation.

Apart from that, it is bad juju for Turkey that Erdogan and his economic adviser won't keep quiet. Their remarks are hardly conducive to restoring confidence. In any case, Turkey will have to go through a sizable economic adjustment. It has become a Mecca for malinvestment during the boom. In light of this, more volatility in the lira and Turkey's financial markets must be expected.

Turkey's stock market is still weakening as well – a new closing low for the move was established on Monday – click to enlarge.

Turkish prime minister Erdogan: purveyor of novel economic theories.

(Photo via The Web / Author unknown)

Charts by: Investing.com, BigCharts, Dolarblue.net