Cold turkey for emerging markets as Fed tapers again

Currencies Direct January 30th 2014 - 2 minute read

Last night the US
Federal Reserve
(FOMC) announced a further 10 billion tapering
to their asset purchase programme.  This announcement of a
further taper follows December’s announcement of a 10 billion taper
and comes despite a huge volatility in emerging market
economies.  We have seen an extreme fallout in emerging market
currencies such as the South African rand, Turkish lira and
Argentinian peso ­- and the Fed turning off the liquidity taps is a
big driver of the rout.  The market was erratic on the news
and there is evidence of concern that further Fed unwinding could
exacerbate the problems for emerging economies and their currencies
as they cope with the ongoing withdrawal of stimulus.  For the
Federal Reserve it sends a strong message to the markets that it
will take more than a spike in volatility to detract from its
process of unwinding their asset purchases. 
meeting was the last for outgoing Fed Chairman Ben
Bernanke who is to be replaced by Janet Yellen.  It has been
notable that Janet Yellen – a renowned dove – has voted twice now
for tapering, which suggests more to come as the Fed target
complete withdrawal by the end of 2014.

The turmoil in emerging markets continues and will now be
closely watched followed by the FOMC meeting.  This week we
have seen the Central Bank of Turkey take a huge leap by raising
rates by 425bp and yesterday the South African Reserve Bank raised
rates by 50bp; so far both moves have failed to stop their
currencies from depreciating.   It is likely we will soon
hear of more action to be taken by EM nations to try to restore
confidence and it may transpire that the IMF will need to be tapped
up for assistance.  In addition, yesterday New Zealand left
rates unchanged and disappointed as a rate hike is expected soon
and this has left the NZD under pressure in today’s trading.

The highlights for today will be German unemployment, UK lending
data and US GDP.  It is expected that the first estimate for
Q4 US GDP will confirm strong growth despite the uncertainty from
the government shutdown.

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