Is it a war on currency or oil, again?

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Last week the Turkish lira fell by 20%, inflation spiking to 15.9% and spooking stocks & currency markets worldwide. Subsequently, all emerging market currencies came under pressure, leading to a fall in stock indices as well. This blog explores what lies underneath the recent currency market rout.

Background - Trade war leading to Currency war?
The US has imposed sanctions on Iran (missile test) & Russia (annexing Crimea). First, the US started pressurizing major oil importers (Germany, China & India) to switch out oil from Iran & Russia. Next, it imposed tariffs on Chinese exports, with China too imposing retaliatory tariffs on the US. And now, it initiated a political row on Turkey by asking Turkey to release Andrew Brunson, a pastor, arrested by Turkey for a planned coup against Erdogan, the Turkish PM. All this has resulted in carnage in the emerging market currencies.


As evident from the above table, the Lira, Rial & Ruble have all been directly hit in the last year. Alongwith countries which are major trading partners of Iran, Russia & China.

Or is it war for Oil?!
While productions of Russia & Iran have dropped significantly due to US sanctions, the US itself has emerged as the world's leading producer of oil for the 4th straight year (14.86mn bpd). And unsurprisingly, US wants major oil importers to buy US oil. Japan & South Korea have moved away from Russia & Iran, while China, India & Germany are yet to. This probably explains the tariff standoff US is posing on China, India & Europe.

And in India's case, (un)fortunately Indian refineries are most suited to process the heavy Iranian crude than the light-weight US crude. The capex and timeline involved in adjusting to US oil could take long. Until then, muscle flexing under trade tariff & sanctions could continue.

What this means to your investments?
India's macro is vulnerable for next one year due to rising oil price, trade & budget deficit, inflation, farm distress, flooding and elections. Stock market valuations are already high and rupee has depreciated 9% in the last year alone. A market correction is due, so be doubly cautious when taking new investment calls!

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