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Emerging Market Currency Crisis Raises Red Flags

Red Flags

Monday, September 3, 2018

NAFTA, U.S.-China Trade war, emerging market turmoil. There are a handful of high-profile problems on the agenda this week. The last-minute failure to bring Canada on board with the NAFTA rewrite last week has rattled the markets, but a deal could still be in the offing this week. Meanwhile, Trump is looking at a serious escalation of his trade war with China, currency problems are weighing on financial markets, and Iran’s crude production losses are providing a lift to oil prices.

Chart of the Week

(Click to enlarge)

- Argentina’s peso has lost more than 50 percent of its value this year, with a deep plunge occurring just last week. The peso fell by more than 20 percent in the last week of August.

- Argentina’s central bank hiked interest rates from 45 to 60 percent in a desperate bid to halt further capital flight.

- Economic problems, inflation, a strengthening dollar, and drought hitting Argentina’s agricultural sector have contributed to the country’s woes.


Argentina’s peso plunged again last week. Argentina’s currency crashed last week, falling by more than 20 percent against the dollar in just a few days. The peso has lost more than 50 percent so far this year. The turmoil in Argentina raises concerns about emerging market contagion, especially coming just a few weeks after Turkey’s lira crisis.

NAFTA negotiations drag on. The U.S. and Mexico reached a bilateral deal on NAFTA renegotiations last week, but talks with Canada stretched past the self-imposed August 31 deadline. President Trump likely complicated the talks after the Toronto Star reported that Trump had said off the record that any deal would be “totally on our terms,” raising a firestorm. The sticking points on the trade deal remain agriculture and automobiles, but there is tremendous pressure to conclude a trilateral deal in the coming days. Related: How Brexit Will Impact The British Pound

Trump said to back $200 billion in China tariffs this week. President Trump is reportedly eager to move forward with $200 billion in tariffs on China, perhaps as soon as this week. The public comment period on the massive proposal ends on September 6, allowing him to proceed. The move would be a dramatic escalation from the current level of tariffs at just $50 billion.


Lithium boom raises risk of water wars. Chile is home to roughly 50 percent of the world’s lithium reserves, the metal needed in batteries used for electric vehicles. But a water shortage could affect lithium mining operations, which are situated in salt flats in arid parts of the country. Reuters reports that the Chilean government has granted water rights to miners that may exceed what is actually available by a factor of six.

Dollar jumps, keeping gold in check. The U.S. dollar jumped at the end of last week on news that the Trump administration could step up the trade war with China while NAFTA talks also hit a stumbling block. The dollar was in demand as a safe haven asset, keeping gold prices in check. Meanwhile, concerns about emerging markets, particularly after the drop of Argentina’s peso last week, also buoyed the dollar and put downward pressure on gold. Typically, gold itself acts as a safe haven when currency problems arise, but the dollar is winning out.

Copper prices hanging on the edge as U.S.-China trade war set for escalation. Copper prices have recovered somewhat recently after being battered for much of this year, but the looming escalation in the U.S.-China trade war threatens to drag down copper even further. After touching a 14-month low in mid-August at $5,773 a ton on the London Metal Exchange, copper prices have rebounded a bit to above $6,100. “Downside risks to copper come from the trade war intensifying, particularly between the United States and China,” CRU analyst Charlie Durant told Reuters. CRU forecasts a copper surplus of about 117,000 tons this year, which will balloon to 198,000 tonnes in 2019.      


Brent crude at two-month high. Brent crude prices are close to a two-month high at above $78 per barrel. News that Iran is losing oil exports at a much faster clip than most analysts had predicted is raising concerns about supply shortages. “Underpinning the prevailing bullish sentiment is the increasingly supportive supply outlook,” PVM Oil Associates analyst Stephen Brennock wrote in a report. “Much of this owed to the downswing in Iranian oil shipments.”

Hedge funds increase bullish bets. Last week, hedge funds and other money managers increased their bullish bets on Brent crude prices by the most since 2016 after several consecutive weeks of liquidation. The sudden reversal in favor of bullish positioning comes on the heels of the loss of exports from Iran. “Hedge funds are starting to be constructive on oil again, which makes sense. We’re heading into these Iran sanctions, which is going to remove supply,” Ashley Petersen, lead oil analyst at Stratas Advisors in New York, told Bloomberg. “The risks are to the upside, more so than to the downside.”

Related: Germany Could Use $55B Budget Surplus To Cut Taxes

Oilfield services demanding higher prices from oil companies. After being forced to cut prices for their services during the oil market downturn that began in 2014, oilfield service companies are pressing producers to reclaim some of that lost ground. “The cost savings that we have achieved over the past three years are not sustainable,” Thierry Pilenko, Executive Chairman of TechnipFMC, one of the world’s biggest oil services groups, said to Reuters. “A rig that was once at $600,000 day is now at $150,000, which is not even cash breakeven,” he said, referring to the price an oil producer pays to rent a rig. “Cost inflation will come back ... The drilling industry working below breakeven is not sustainable.” The result could be higher costs for producers.


Venezuela’s “petro” backed by questionable reserves. Reuters reports that Venezuela’s cryptocurrency, the “petro,” is supposedly backed by 5 billion barrels of oil reserves located in a remote part of the country where there is little oil infrastructure and no effort at development. “There is no sign of that petro here,” a local resident told Reuters.

84 percent of executives looking at blockchain. A survey by PWC of business executives found that 84 percent of respondents said their companies are “actively involved” with blockchain technology. “Everyone is talking about blockchain, and no one wants to be left behind,” according to PwC's 2018 Global Blockchain Survey, which included 600 executives from 15 territories, CNBC reports. Among executives that have technology responsibilities, roughly 45 percent said that “trust” was a major obstacle to widespread adoption of blockchain technology.

Bitcoin recently hit one-month high. Bitcoin prices recently climbed to a one-month high above $7,000. The technical charts suggest that Bitcoin faces some resistance on the upside in the near-term, but that the cryptocurrency could be entering a new trading range between $7,000 and $7,500.

By Josh Owens for Safehaven.com 

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