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Pressure on EM Currencies

April 2015

Soybean and maize prices may head downwards too

EM Currencies May Face Headwinds

As US dollar gains strength at the expense of many major currencies, the debt segment in the emerging markets are going to face a problem of a different kind. As per BIS data (2014), between 2009 and 2013, non-financial corporate borrowers in Emerging Markets increased foreign indebtedness by $650 billion, often to fund domestic operations. As the value of US dollar liabilities rise relative to home currency, the burden of servicing the debt increases. This negative shock to balance sheets trigger domestic rate increases to defend the currency.

Soybean

The soybean prices face downward price risk in the short-term. Soybean production in 2014-15 was revised upwards on good harvest prospects in Brazil. Utilization is likely to go up and competitive prices will boost demand. Trade in 2014-15 is raised by 2.9 million tons on higher demand by China. Buying interest from China and concerns about dryness in South America and firmness of the US dollar worked in favor of bearish market. Favorable conditions in Brazil might provide comfort.

Maize

Maize prices may head southwards in Q1, 2015. Though maize production in 2014 is expected to exceed the 2013 record with a sharp increase in the EU, South Africa and the US which would more than offset a decline in China and the CIS. The utilization in 2014-15 set to increase by 2.8 percent as competitive prices might boost global feed use of maize. China has tapered off the imports of maize that pushed the volume and value down in world trade.

The crop prospects are generally favorable in Brazil and Argentina, South Africa, Mexico and India. Export quotations were weaker during January 2015, on a comfortable outlook for world supplies, including mostly favorable crop prospects in South America. Downward pressure on prices emanated from the US about future demand for maize-based ethanol production.

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