A rising dollar means a double whammy for Azerbaijan - OPINION

Baku. 17 February. REPORT.AZ/ The move makes sense given that Azerbaijan’s dominant export, crude oil, is priced in dollars and because the combination of a falling crude prices and a rising dollar means a double whammy for oil exporters like Azerbaijan that are pegged to the USD. Report was told by the Head of FX Strategy Saxo Bank, John J.Hardy. 

According to him, It is entirely inappropriate for your currency to strengthen when your export income is collapsing by almost 50% in the space of mere months. It is interesting to see that they are talking about aiming for a EUR and USD basket arrangement rather than simply managing a decline in the manat versus the US dollar, though I assume they will want a managed general decline in the currency before targeting a new level in this basket, because if the Euro stabilizes from here rather than continuing to fall versus the US dollar, then there won’t be any manat weakening.

He added that, The manat should definitely weaken, with the question being how many reserves the Azerbaijan central bank will want to spend on managing the decline, which might be a delicate process if domestic capital feels it is unwise to hold any exposure to the local currency and would prefer to get out of manta-based assets in favour of foreign currencies.

As the head of FX Strategy states, with deflationary forces a significant risk in the world, this is clearly being implemented with the aim of pushing domestic inflation higher, and a weaker domestic currency should spark some inflation in line with that devaluation. The trick with this kind of a situation is avoiding excess domestic capital flows out of manat- denominated assets as domestic investors look to avoid a mark-down on the value of their assets, which could theoretically require use of significant central bank reserves to avoid an excessive devaluation in the currency. That only becomes a greater risk, in my estimation, if oil prices fall significantly and stay there for a longer period of time, which might require a larger devaluation than the Azerbaijan central bank is planning at this time.