Selling Pressure in EM Currencies Eases

by Marilou Long on February 4, 2014

in currencies,equity market,Fed policy,Foreign Markets,interest rates

The strong sell-off in emerging markets of the past two weeks began to ease today.  From the linked WSJ article:

Emerging-market currencies rose against the dollar on Tuesday, recovering modestly from their sharp selloff of the past two weeks.

The South African rand and Turkish lira, two of the hardest-hit currencies in recent weeks, led the rebound. The dollar was down 1.4% against the lira at TRY2.2518. It fell 1.3% against the rand, trading at ZAR11.1376. The Indian rupee, Mexican peso and Brazilian real also strengthened.

Not all developing-market currencies staged a rally: Ukraine’s hryvnia, which is usually tightly managed by that country’s central bank, picked up the pace of its recent decline. The dollar was up 1.2% to 8.755 against the hryvnia, according to FactSet. The Peruvian sol also edged 0.1% lower against the dollar to PEN2.826.

Analysts attribute Tuesday’s recovery to hedge funds and other speculative investors booking profits on recent bets against emerging-market currencies. Investor cash has been pouring out of emerging markets this year on concerns about slowing Chinese growth and diminishing Federal Reserve stimulus, which would reduce the amount of foreign money invested in emerging markets and expose the vulnerabilities of those developing countries with high current-account deficits.

The taper has been one of the big culprits in the EM turmoil as reduced liquidity has added to market volatility.  Ed Yardeni’s Morning Briefing from 1/30/14 discusses the linkage.

The message to emerging economies in yesterday’s FOMC statement was: “Vaya con Dios.” Of course, that phrase did not appear in the statement. Rather, it was implied when the recent crisis among several emerging economies wasn’t mentioned at all. In other words: “We wish you well, but your problems aren’t our problem. So there’s no reason to suggest that your crisis is having any impact on US monetary policy.”

Indeed, Fed officials seem quite sanguine that the crisis among some of the emerging economies won’t have any significant impact on the US economy. On the contrary, the FOMC statement noted: “The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.” The exact same comments appeared in the previous statement following the 12/18 meeting of the FOMC. I agree with the Fed’s assessment. 

As was widely expected, the FOMC voted to taper QE by another $10 billion to $65 billion per month. There were no dissenters. So the committee unanimously voted to reject the recent advice of IMF officials and economists to temper their tapering for the sake of the emerging economies. Meanwhile, on Tuesday, the central banks of Turkey and India tried to stem the plunge in their currencies, which could quickly boost inflation, by raising their official rates:
 

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