Free float sinks Kazakhstan’s currency

The value of the national currency of Kazakhstan, the tenge, dropped 23 percent on Thursday, following the government’s decision to allow a freely floating exchange rate.

The exchange rate between the tenge and US dollar changed from 185 to 255 after the policy shift. According to local media, people are queuing at banks and exchanges, most of which have stopped selling dollars.

"The decision was made to start a new economic policy from August 20 on the basis of inflation targeting and to cancel the currency corridor," Prime Minister Karim Masimov said during a government teleconference on Thursday, citing a joint statement of the government and the National Bank. The market will determine a balanced exchange rate on the basis of supply and demand, with the National Bank intervening if stability is threatened, the minister added.

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The Kazakh government’s decision comes on the back of instability in the global economy. Kazakhstan is Central Asia’s biggest crude exporter, and is trying to manage sliding oil prices and weakening economic growth of its top trading partners China and Russia.

Last week China devalued the yuan and was changing the way it is fixed daily, causing turmoil in other emerging market currencies. Vietnams is a smaller trading partner of Kazakhstan and devalued its currency earlier this week.

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The Russian ruble has plunged to six-month lows this month, reacting to falling oil prices and the crisis in China. The second quarter contraction of Russian GDP was the worst in six years, according to official statistics.

Some analysts link Kazakhstan’s switch to a free float with a possible interest rate hike in US.

“It’s a move to prepare for the Fed rate hike,” Tommy Ong, Managing Director for Treasury and Markets at DBS Bank Hong Kong, told Bloomberg. “In anticipation of higher US interest rates, some emerging-market countries are opting to let their currencies weaken to stimulate exports and avoid massive intervention.”

The Federal Reserve last month said it won’t increase the interest rate. However, Fed Chief Janet Yellen indicated the bank could move rates as early as September. The World Bank then warned that the US rate rise poses “tough challenges” for developing and emerging economies.