Kazakh devaluation triggers sell-off

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Evidence of deteriorating economic conditions in central and eastern Europe fuelled a broad-based return to risk aversion in currency markets on Wednesday after Kazakhstan devalued its currency and Russia’s credit rating was downgraded.

Michal Dybula, at BNP Paribas, said: “Balance of payments look weak across the entire central and eastern European region, and on top of that we have sizeable external debt maturing over the next couple of months. Purely on the basis of fundamentals we should expect further currency weakness in the region.”

Kazakhstan’s central bank said it had widened the trading band for the tenge, allowing the currency to fall by 18 per cent against the dollar to 150 tenge, in response to weaker oil prices and the impact of the global economic crisis.

Kazakhstan’s devaluation triggered a wave of selling of emerging market currencies, with Poland’s zloty plumbing a fresh five-year low against the euro, at 4.7005 zloty, before paring its losses to trade 0.4 per cent lower at 4.6540 zloty by mid-afternoon in New York. The Czech koruna slid 0.5 per cent against the euro to an intraday low of Kcs28.673.

Christian Lawrence, at RBC Capital Markets, said: “Kazakhstan killed risk appetite within currency markets.”

Hungary’s forint hit a record low of Ft304.24 against the euro, before reversing its losses to jump 0.7 per cent to Ft298.05, amid rumours that the central bank had intervened to prop up the currency. The central bank declined to comment.

The rouble was hit after Russia’s credit rating was downgraded by Fitch, the rating agency. The rouble fell as low as 40.95 against its euro/dollar basket, within striking distance of the 41 level where many analysts expect the Russian central bank would intervene.

The flight from riskier assets helped lift the dollar and the yen, as investors reverted to safe-haven buying. The dollar rose 1.4 per cent against the euro to $1.2858 and rose 1.3 per cent against the Swiss franc to SFr1.1579. The US currency was flat against the pound at $1.4459, with sterling helped by data showing a slower rate of decline in British output in January compared to December.

Late in New York, the dollar was also unchanged against the yen at Y89.48 and pared modest early gains as US stocks slipped.

Elsewhere, the Norwegian krone was in demand after Norway’s central bank cut rates by the widely expected 50 basis points. The krone jumped 1.5 per cent against the euro to NKr8.8637.

Paul Mackel, at HSBC, said: “Norway’s currency has rallied because some were thinking that the krone’s recent appreciation justified a bigger rate cut, but also because the Norges Bank signalled less willingness to keep cutting rates ahead.”

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