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Under the joint stimulus of factors such as rising U.S. and oil prices and high external debts, the exchange rates of local currencies against the U.S. dollar in some emerging market countries have fallen sharply, and a new round of "currency defense war" has to be launched. After the Turkish Central Bank announced in the first week of June that it would raise the weekly repo rate from 16.5% to 17.75%, India also unexpectedly raised interest rates.

    According to data from the Fund Flow Monitoring Agency (EPFR), the asset scale of the US money market has risen to the highest level in eight years. In addition, the scale of allocation of U.S. inflation-protected bond products also hit a new high since the fourth quarter of 2016. Emerging market bond markets and European stock markets have become the biggest losers in this “migration” of funds.

"The flames of war" spread to India

    The Central Bank of India announced on June 6th Beijing time that it would raise the repo rate from 6% to 6.25%, and the reverse repo rate from 5.75% to 6%, maintaining a neutral monetary policy stance. This is the first time the Bank of India has raised its benchmark interest rate since 2014 in response to the depreciation trend of the Indian rupee.

    This is another major emerging economy in the world that has recently taken the initiative to raise interest rates to respond to the depreciation of its currency. Since the beginning of this year, the Turkish lira has been under depreciation pressure, and the current exchange rate of the lira against the US dollar has fallen by more than 17%, triggering investors' concerns about Turkey's economic prospects. On May 23, the exchange rate of the lira against the U.S. dollar fell to 4.92, a daily decline of 5%, the largest decline in the past 10 years. Last week, the Central Bank of Turkey announced that it would raise the weekly repo rate from 16.5% to 17.75%. In addition to the above two countries, this year, Argentina, Brazil, Indonesia, the Philippines and other countries have fought a "currency defense war" this year.

    Recently, the Bank of Indonesia raised interest rates twice in two consecutive weeks, raising the benchmark 7-day repo rate from 4.25% to 4.75%. President Perry Warjiyo was ordered in danger on May 24, and only one week after taking office, he urgently carried out a second interest rate hike. However, two consecutive interest rate hikes were unable to prevent the depreciation of the Indonesian rupiah. Perry Warjiyo also called for the Fed to slow down its balance sheet reduction.

    According to Bloomberg, Warjiyo publicly stated in his first interview with international media that the Fed's rapid reduction of its balance sheet will have a huge impact on emerging markets. Warjiyo said unabashedly: "Although each country will make corresponding decisions based on its national conditions, you must consider the impact of your actions on other countries, especially emerging markets."

    BNP Paribas analyst Marcelo Carvalho predicts that given the hawkish speech of Bank Indonesia Governor Perry Warjiyo, the bank may raise interest rates two more times in the next few months.

    The U.S. dollar and oil rising together is the "source" of the crisis of currency devaluation in such countries. The direct fuse of this emerging market currency shock was the sharp appreciation of the U.S. dollar that began after April 17. In just a month and a half thereafter, the US dollar index rose sharply by 6.2%. For comparison, the US dollar fluctuated only about 10% throughout the year in 2017. The sharp appreciation of the U.S. dollar led to the outbreak of currency risks in some emerging market countries with outstanding external vulnerabilities, and a sharp depreciation of their currencies occurred in a short period of time. The central banks of relevant countries were forced to raise their own policy interest rates to alleviate the pressure of large-scale capital outflows and sharp shrinking of foreign exchange reserves.

    The direct cause of the recent financial market turmoil is the obvious strengthening of the US dollar exchange rate. The US dollar index has risen from around 90 to around 95. The strength of the US dollar index has led to a significant depreciation of emerging market currencies such as the Turkish lira and the Argentine peso against the US dollar. Their currency depreciation has triggered capital outflows from these countries. Capital outflows and currency depreciation have further strengthened each other, resulting in relatively turbulent financial markets in these two countries. Although their central bank has continuously raised interest rates, it has not reversed this trend.

    According to analysis by industry insiders, from historical data, every time a large-scale currency depreciation occurs in emerging markets, it not only corresponds to a strong US dollar, but also often corresponds to high oil prices. Analyzing emerging market countries that have experienced exchange rate fluctuations recently, high oil prices are still an important driver of the crisis.

     "For oil-importing countries, the problem they face is that the dollar price of oil and the dollar have strengthened at the same time, leading to a double increase in the price of oil denominated in their own currency." Zhang Ming said.

    The statement of the Central Bank of India regards crude oil price fluctuations and global financial market dynamics as risk points for the economic outlook. Oil is India’s largest import. The price increase not only poses a threat to inflation, but also poses a serious threat to the country’s trade deficit and puts greater pressure on the country’s currency.

Emerging market countries experience a "sell wave"

    In mid-May, emerging market assets led by Argentina and Turkey started a violent sell-off. The stock market, bond market, and foreign exchange market fell into violent shocks: stock indexes plummeted, treasury bond prices plummeted, and yields soared to double digits. The exchange rate has repeatedly set the lowest record in history.

    Wall Street has previously mentioned that the majority of emerging economies’ currencies are so fragile because their economic fundamentals are not stable, including high current account deficits, heavy foreign debt, and a high degree of dependence on overseas funds.

    Turkey, Argentina, Colombia, South Africa, Mexico, Indonesia and other current account deficits account for the highest proportion of GDP. Moody's predicts that Turkey's current account deficit ratio will rise to a high of 4.5% this year.

     In addition, as the U.S. dollar continues to strengthen, the pressure on capital outflows faced by emerging countries has gradually increased. According to data from the Institute of International Finance (IIF), in May, foreign investors withdrew USD 12.3 billion from emerging markets, which was the largest outflow since November 2016. Among them, the bond and stock markets each outflowed about 6 billion U.S. dollars; Asian countries outflowed 8 billion U.S. dollars