If you think emerging Europe currencies have run their course to the downside, take another look at the CIS (Commonwealth of Independent States). This being the only European sub-region dominated by dollar pegs, monetary authorities for the most part have only recently succumbed to mounting fundamental pressures. While the Ukrainian hryvnia, Russian rouble and Georgian lari have sold off by 62.9%, 20.6% and 17.8% versus the dollar peak-to-date, currencies such as the Mongolian tugrug, Belarusian rouble and Armenian dram have thus far only had moderate devaluations of less than 3%. Moreover, some others such as the Azeri manat and Kazakh tenge have barely moved at all.

What historical CIS currency movements have taught us is that they all move in the same direction, if not over the same period. While some CIS central banks can hold out for longer than others, especially those on the energy export side of things, ultimately the correlated trade dynamics and broadly similar international perception of risk across the region mean that they all face the same directional pressures over the same periods.

It is clear that the negative global economic outlook is going to remain in play for at least another year. Take our regional underperformer, Ukraine, as a benchmark. If I were a doctor and Ukraine my patient, a full body examination would likely uncover a host of ailments. While the hryvnia may be akin to a failing heart, the patient also suffers from a severe iron deficiency (plummeting steel exports), and a slight case of schizophrenia with multiple personalities (political turmoil with absolutely no clear direction in policy making, with numerous actors each trying to pull the country in its own direction). Making matters worse, the patient is also unable to pay for his medication (deteriorating credit conditions and the near collapse of the domestic banking sector). Thankfully, these problems would likely be easily identifiable to even the most inexperienced of medical interns, manifesting themselves in a severe temperature (Ukraine’s 5-year CDS continues to trade around 2,100bps), and a bad case of the shakes (Ukraine’s PFTS equity index has lost approximately 76% of its value this year).

Tags: Belarus, Currencies, depreciation, devaluation, Georgia, hrynia, lari, Rouble, Russia, Ukraine
Posted in: Currencies, Emerging Europe, General
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