Report
A vicious circle is set in motion when an emerging currency begins to depreciate sharply
The cases of Argentina and now Turkey show that when a country’s exchange rate begins to depreciate sharply, it becomes all but impossible to avoid a collapse of its currency. The mechanism is as follows : It becomes impossible for the central bank to put in place interest rates that offset the expected depreciation and stop speculation of a fall in the currency; Inflation becomes very high and, to hedge against it, the country’s economic agents convert their monetary assets into foreign currencies; In addition, imported inflation causes domestic demand and activity to fall, which exacerbates the loss of confidence. Emerging countries therefore need to rapidly arrest any downward movement in their exchange rates.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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