FX pegs under pressure in emerging markets as commodity prices fall

Wed Aug 26, 2015 1:16pm EDT
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By Sujata Rao

LONDON (Reuters) - Plunging commodity prices are testing the viability of emerging currencies' long-standing pegs to the dollar, with some already abandoned as countries balk at the cost of clinging to fixed exchange rates.

Kazakhstan unshackled its tenge last week, and bets are growing that from Hong Kong to Saudi Arabia, dollar pegs are at risk.

"Markets are now questioning the sustainability of other dollar pegs, wondering which will be the next domino to fall," Deutsche Bank told clients.

A peg fixes the value of one currency relative to another and uses central bank reserves to enforce the relationship. Pegs are relatively rare these days among the bigger economies, partly because of the 1997-2002 emerging market crises that were exacerbated by the cost of clinging to fixed exchange rates.

Kazakhstan's tenge has fallen 30 percent KZT= since it was depegged last week under pressure from falling commodity prices and steep depreciation in neighboring Russia's rouble.

Russia ended its own flexible or "crawling" peg to the dollar after burning billions of dollars in reserves to defend the rouble RUB= while Ukraine and Belarus followed suit earlier this year UAH= BYR=.

Now pressure is mounting on others, especially "petro-pegs" such as in Azerbaijan, Saudi Arabia and Nigeria.

Justifying the cost of clinging to them will become increasingly difficult for those reliant on commodities and exposed to China's weakening economy, says Simon Quijano-Evans, chief EM strategist at Commerzbank.   Continued...

A picture illustration shows Kazakhstan's tenge and U.S. dollars banknotes in Almaty, Kazakhstan, August 21, 2015.  REUTERS/Shamil Zhumatov