2018-08-14

Can't Escape the Dollar Cycle

iFeng: 逃不掉的美元周期,历史上的三轮新兴市场危机
ntroduction: Since the 1970s, emerging markets (EM) have experienced three large-scale exchange rate depreciation - the 1980s; the late 1990s; 2015-2016. And each round of emerging market currency depreciation corresponds to a strong dollar background, and eventually led to serious stagflation in some emerging economies, resulting in economic and financial crisis.

Combined with the previous article, we believe that each of the emerging crises driven by the strong dollar is the background of the appreciation of the US dollar. The fastest-growing emerging markets in the current period suddenly have liquidity, the financing conditions are suddenly braking, and the leverage ratio has risen sharply. The exchange rate devaluation is not only the appearance of this process, but also a negative feedback loop with the imbalance of emerging market economies.

Source: GF macro Author: GF macroeconomic research team

After some discussion of Turkey, the article moves on to the resource exporters and manufacturing countries:
For resource-based emerging markets. Resource-based EM countries include Brazil, South Africa, and Russia. Under the dollar-denominated monetary system, the natural seesaw relationship will lead to a decline in the implicit dollar value of resource products, weaken the global competitiveness of resource countries, and promote the depreciation of the exchange rate of resource countries. The sharp depreciation of the local currency will inevitably lead to imported inflation. Therefore, in a strong dollar environment, resource-based countries tend to have high inflation or even hyperinflation, and the economy is in a period of stagflation. Corporate profitability has weakened and domestic financing costs have risen sharply. The weak dollar cycle is logically opposite: the hidden value of the dollar in the resource product rebounds, the global competitiveness of the resource country increases, the corporate profit improves, the exchange rate appreciation reduces the input inflation risk, and the internal financing cost falls back.
Learn from Chile.
For production emerging markets. Production type EM includes Korea, China, and the like. In South Korea, for example, the strong dollar background has depressed the price of resource products, and producer countries have low input inflation. However, monetary policy tends to lag behind economic growth and inflation. Therefore, a strong dollar often leads to a country with a downward trend in inflation and a rebound in real interest rates. The willingness to invest in the sector is weak. On the contrary, in the weak dollar environment, inflation in the producer countries rebounded, real interest rates fell, and private sector investment will increase.
What's notable is how little China is mentioned in this research piece.

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