Currencies give a thumbs up
It is not only emerging market stocks that have greeted the latest rate hike by the Federal Reserve with a smile. Currencies from these nations have strengthened against the US dollar (UUP) as well. Usually, a rate hike implies a stronger domestic unit, but the dollar has weakened as shown by the drop displayed in the dollar index towards the end of the graph.
Meanwhile, the MSCI Emerging Markets Currency Index, which tracks the performance of 25 emerging market currencies against the US dollar, has risen, both in YTD 2017 and post the rate hike announcement by the Federal Reserve on March 15.
A rate hike is usually detrimental to emerging market currencies because investors take money out of emerging markets into the safety of US assets in light of higher interest rates. This leads these currencies to weaken. But the reason for their strengthening against the dollar was the Federal Reserve’s outlook on future rate hikes.
The central bank seemed to stick to its path of slow rate hikes, projecting two more rate hikes this year. This is in line with its December 2016 projection of three rate hikes in 2017. Several market participants were expecting the Fed to increase the pace of rate hikes this year in light of benign economic conditions in the US. This adherence to its projected path relieved some worries for these currencies, thus leading to a rise.
Five of the biggest gainers post the Fed decision
South African rand: The South African rand was up 2.8% against the dollar on March 15. It continued its rise the next day on the Fed’s updated guidance on the number of rate hikes expected this year.
Mexican peso: The Mexican peso was up 2.3% against the dollar on March 15. At 19.22 pesos to a dollar, it hit its highest against the greenback since President Trump got elected. Given the US administration’s stance on North American Free Trade Agreement (NAFTA), the Mexican peso was among the hardest hit units after Trump won the presidency in November last year.
Brazilian real: The Brazilian was up 2.1% against the dollar on March 15. However, it fell a bit after the country’s central bank intervened in the foreign exchange market by resuming currency swaps. It had support from rating firm Moody’s decision to upgrade its outlook to ‘stable’ from ‘negative.’
Turkish lira: The Turkish lira was up 1.8% against the dollar on March 15. However, the primary reason of its rise was because the country’s central bank raised its late liquidity window rate from 11% to 11.75%.
Hungarian forint: The Hungarian forint was up 1.7% against the dollar on March 15. The outlook of the Fed on the pace of rate hikes was the primary driver for the currency.
In Asia, the South Korean won and the Taiwanese dollar have been major movers against the dollar.
In the next article, let’s look at why emerging markets may actually be looking forward to rate hikes in the US in 2017.
