Commentary: Currencies recoil

21 June 2013 09:56  [Source: ICB]

As the US Federal Reserve considers pulling back from monetary stimulus, vulnerable economies such as India are seeing steep declines in the value of their currency

Fluctuating currencies tend to hit vulnerable economies, and make doing business unpredictable and difficult for importers and exporters in all sectors. Although a falling currency can make exports more competitive, it also raises the price of imports which can fuel inflation.

Weaker economies in the eurozone, such as Greece, Spain and Portugal have been the victims of the strength of the euro, which has been blamed for stifling exports and keeping costs far higher than they would have been under a depreciated local currency.

 

 Indian importers grapple with the sliding rupee

Copyright: PA

Now it is the turn of India to feel the currency effect. Following the news that the US Federal Reserve may significantly reduce its monetary stimulus programme, the rupee dropped to its lowest point ever against the US dollar as speculators bet against it. As well as suffering from poor economic growth and high inflation for an extended period, the country's current account deficit has hit record highs.

India's chemical industry is now having to grapple with an economic slowdown, as well as low and fluctuating currency. Its car sales fell for the seventh month in a row, recording a 12% decline in May. Tyre makers there are now operating at reduced rates of 70-80%. Importers of styrene butadiene rubber have been hit by the double whammy of poor demand and the collapsing rupee which has led to steep falls in prices.

Meanwhile, acetone importers have been unwilling to accept offered prices for July cargoes because of the weakening currency.

Reduced imports should, of course, stimulate demand for domestically-produced material. However, local acetone prices have only moved up marginally, indicating how poor domestic demand is likely to be.

The story is slightly different for India's polyethylene (PE) and polypropylene (PP) markets. Here, imports have become less attractive but this has led to hikes in prices and demand for domestic material. Local polyolefins producers have hiked prices by Rs2-3/kg ($0.33-0.49, €0.25-0.36) in recent weeks.

The actions of policy-makers all over the world is impacting business conditions, as we've seen with the recent volatility in Japan's currency and stock markets. If the US Federal Reserve follows through on its promise, we can look forward, potentially, to many more gyrations in the value of currencies and commodities such as oil as markets reorientate themselves.


By: Will Beacham
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