Emerging markets unexpectedly benefit from upbeat Fed

June 14, 2018 08:37 AM

Despite the Federal Reserve coming across much more upbeat than expected after raising U.S. interest rates for the second time in 2018, some softness in the dollar following the decision has provided a short-term boost to many different emerging market currencies. 

In a surprising move, traders appear to be taking profit on the Dollar after the latest U.S. interest rate decision. This is benefiting many different emerging market currencies in early Thursday trade. With exception of the Indonesian Rupiah, Thai Bahtand the New Taiwan dollar, most emerging market currencies across Asia are trading higher against the USD at time of writing. This includes the Malaysian Ringgit, Chinese Yuan, Indian Rupee, Philippine Peso and Korean Won.

Although this would be seen as negative news for holders of emerging market currencies, I am unsure how long this rebound in sentiment will last. It could be a temporary move, largely encouraged by investors taking profit on a persistent resurgence in the dollar over the second quarter of 2018. After all, the Federal Reserve appeared significantly more upbeat than most expected yesterday with markets even receiving a surprise by seeing two more U.S. interest rate increases before the end of the year in the dot plot forecast. Federal Reserve Chair Jerome Powell also appeared very optimistic about the current health of the U.S. economy in his comments.

The combination of an improved fundamental outlook for the United States and an adjustment higher in U.S. interest rate expectations will probably encourage investors to purchase the dollar at lower levels.

Lira unable to find buyers

As an exception to the theme that there seems to be an improved appetite towards most emerging market currencies in early Thursday trade, the Turkish Lira is still suffering from a lack of buying appetite and is already down by another 0.5% for the day. There are a number of different factors that are persistently weighing on sentiment for the Lira, including worrying inflation and ongoing concerns about the direction of the country in the lead up to the Turkish general election on 24 June.

The motivator behind the latest woes for the Lira is more likely than not traders pricing in the broad concerns that President Recep Erdogan will undermine the central bank if he is declared victorious in less than two weeks from now.

ECB next on investor radar

While this has already been a historic week and what many are proclaiming to be the busiest week of the year for the financial markets it is not over yet, with the latest meeting with the European Central Bank (ECB) set to conclude today.

It is already considered a foregone conclusion that the ECB will be leaving monetary policy unchanged today, although many investors are hoping for guidance on its plan to exit quantitative easing. 

With the financial markets now appearing much calmer around the recent political uncertainty in Italy, I find the Euro attractive at its current levels and it could receive a bid today if the ECB offers any insight about exiting QE.

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