EM Currency Pegs Falling

Emerging Market (EM) currencies remain under pressure. We warned two weeks ago that the Chinese yuan devaluation could spark similar moves elsewhere, and the past week saw Vietnam and Kazakhstan throw in the towel. Following a 1.0% drop on August 19, Vietnam's central bank has devalued the dong by a cumulative 3.0% this year, despite the bank's governor saying previously that it would not be devalued more than 2.0% in 2015. With export competitiveness under pressure, we now expect a further drop of 2.0% to an end-year rate of VND23,000/USD.

Meanwhile, the Kazakh central bank let the tenge float on August 20, causing it to immediately drop by 25% and marking a shift to a free-float/inflation-targeting regime five years ahead of schedule. While several factors contributed to these moves, crucially, China is a primary trading partner for each country. The fallout from the China crisis is not over, and EM FX weakness will continue. Nigeria's naira and Egypt's pound come to mind.