Emerging market currencies slump

Emerging market currencies tumbled Friday, weighed by continued geopolitical worries and on concerns that a sharp slowdown in the U.S. will undermine global demand for commodities.

The South African rand tumbled to a more than three-year low versus the U.S. dollar. The Brazilian real dropped to its lowest level in almost three months. Elsewhere, the Turkish lira and the Iceland krona were both sold off sharply.

"Fear of a deeper-than-expected slowdown in the U.S. is having knock-on effects for oil prices and for emerging markets."

Paul Guest, senior economist at Moody's Economy.com.

"The drop in commodities compounds the impact on some of the emerging market currencies like the South African rand, which is associated with growing deficits"

Amarjit Sahota, a currency strategist at HIFX.

In the U.S., the odds of an interest rate cut continued to rise, as a scenario for a hard-landing for the U.S. economy continued to take shape after data showing manufacturing activity in the Philadelphia region contracted in September for the first time in 3 1/2 years.
The fed funds futures market is now pricing in a 26% chance that the Fed will lower its target for overnight rates to 5% from 5.25% this year. The Federal Reserve held overnight interest rates steady at 5.25% on Wednesday and said inflation remains a risk, but added that it expects a slower economy to reduce inflationary pressures.
Adding to the rand's woes Friday is a report that showed the nation's current account deficit remained at elevated levels.
The South African deficit declined just slightly to 101.7 billion rand, or 6.1% of gross domestic product in the second-quarter, from a record 103.1 billion rand, or 6.4% of GDP in the opening three months this year.
Analysts say while the deficit was still fully financed by capital inflows, the growing negative sentiment regarding many emerging market assets will continue to pressure those countries with large current account shortfalls.
"There is clear evidence that the current account deficit has peaked but underlying trends continue to suggest that it will remain around 5.5-6% of GDP until the end of the year," said Rory MacFarquhar, an analyst at Goldman Sachs, in a note. "This continues to weigh on the rand which so far has weakened by about 3% since the release of the data."

Political woes

Compounding the pessimism regarding the U.S. outlook, "emerging market currencies ran into heavy selling as political troubles in Poland added to the recent events in Thailand, Brazil, and Hungary," Moody's Guest said.
The baht tumbled more than 1.3% to a low of 37.9 versus the greenback Tuesday, posting its biggest one-day loss in three years, after news that Thailand's military staged a coup against the nation's prime minister.
The Polish zloty was a touch weaker against the euro Friday after a dispute over government spending caused the collapse of the country's ruling coalition, possibly triggering a new general election.
The rand last traded down 0.3% at 7.6086 per U.S. dollar. The Turkish lira was off 1.2% at 1.5085; The Hungarian forint was off 0.3% at 216.45. The Iceland krona was down 1% at 70.57. The Brazilian real was off 1.7% at 2.2101.
The Thai baht bucked the downward trend, trading at 37.3040 versus the greenback, up 0.4%.