Currency investors rebel as emerging-market rate jumps fail

South Africa

Hours later, the South African Reserve Bank unexpectedly raised its benchmark to 5.5% from 5% in the first increase since June 2008. None of the 25 economists surveyed last week predicted the change, overlooking officials concern that a weaker rand and faster inflation had replaced slower global demand and mining strikes as their chief concern.

“The bottom line is they should have started hiking rates earlier or should never have allowed rates to become as they are right now,” said Jana le Roux, a Johannesburg-based analyst at ETM Analytics.

The rand fell 2% 11.2656 after reaching as low as 11.3803 per dollar, the weakest since October 2008.

The rot spread as Russia’s ruble touched an all-time low of 41.0056 against Bank Rossii’s target dollar-euro basket. Brazil’s real reached a five-month low of 2.4505 per dollar, even as the central bank has raised benchmark borrowing costs 3.25 percentage points since April, the most in the world. The forint fell 1.4% against the euro.

Pushing Policy Makers

“Capital may be pulling out of assets with low risk premium in light of today’s Fed meeting,” Pal Saaghy, a Budapest-based currency trader at broker Equilor Befektetesi Zrt., said by phone today. The Turkish rate decision “just shows that other countries can get into the same situation,” Saaghy said. “The market may have realized that they can force central banks into raising rates.”

India’s rupee nevertheless completed its biggest two-day gain in more than two months a day after the Reserve Bank of India boosted its key rate to 8% from 7.75%.

“Raising rates during a period of obvious economic deceleration following massive build-ups of domestic private sector credit is rarely a recipe for attractive investment markets,” Michael Shaoul, the New York-based chairman and chief executive officer of Marketfield Asset Management LLC, which oversees $21 billion, wrote in a note to clients today.

A Bloomberg index of the 20 most-traded emerging-market currencies fell 2% this month, extending last year’s 7% slump, the biggest since 2008.

Stocks Decline

The MSCI developing-nation gauge has now fallen 6.6% in January, the third monthly drop, heading for the longest losing streak since a similar stretch ended May 2012. More than $1.1 trillion has been erased from the value of emerging-market equities since the Fed signaled in May that it could start scaling back bond purchases that boosted demand for higher- yielding assets.

“It is possible that investors fear that the EM central banks have fired their lost shot and will be unable to follow through with more tightening or that economies, politics are too weak to support rate hikes,” said Steven Englander, the head of currency trading for major industrialized nations at Citigroup Inc., the world’s second-biggest currency trader.

Eyes now turn to the Fed, which announced in Washington today it will lop another $10 billion from its monthly bond buying to $65 billion. The central bank will continue to cut purchases by $10 billion at each of the next six FOMC meetings, with the program ending no later than December, according to Bloomberg’s Jan. 10 survey of economists.

Bill Gross, chief investment officer at Pacific Investment Management Co., recommended avoiding the run-up in risk by buying U.S. Treasuries. “Turkey and South Africa flunk currency tests -- don’t wait around to see who’s next,” he said on Twitter.

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