EM currency mayhem extends into Monday

Written by fe Bureau | Mumbai | Updated: Jan 28 2014, 11:18am hrs
The rout in emerging market (EM) currencies and equities continued on Monday as fears of a sharp slowdown in the Chinese economy and an accelerated taper by the US Federal Reserve saw investors taking risk off the table. Markets anticipate the Fed may buy $10 billion less worth of bonds, reducing the stimulus to $65 billion a month in the wake of a better-than-expected outlook for the US economy in 2014.

The Federal Open Market Committee (FOMC) is scheduled to meet on January 28 and 29 to review the quantum of tapering; the pace of the stimulus has already been pruned by $10 billion to $75 billion.

The Indian rupee, which has outperformed its peers in recent weeks, stumbled on Monday to hit a nine-week low, breaching the 63 mark to end the session at 63.10 to the dollar. Although the countrys current account deficit has narrowed sharply to 1.2% of GDP in the second quarter from 4.9% of GDP in Q1 and forex reserves are at $292 billion, the currency depreciated 1.3% over a week.

South Africas rand dropped versus all but two of its 16 major peers and South Koreas won declined for a sixth day, Bloomberg reported, adding that Turkeys lira rebounded from a record low after the central bank said it would stabilise prices. There is clearly some trauma globally, but we are in a much better shape than we were in May, said Jamal Mecklai, CEO at Mecklai Financial.

The Reserve Bank of India (RBI), which meets on Tuesday to review monetary policy, is unlikely to announce any measures for the currency market until the FOMCs outcome on Wednesday. With the RBI widely expected to hold rates, currency market players believe the Feds decision would determine the course of currencies.

The run on emerging market currencies weighed on the equities markets the benchmark BSE Sensex lost more than 2%, marking its highest daily fall since September 3.

Foreign institutional investors (FIIs), the largest drivers of the Indian market, dumped shares worth $212 million on Monday, the highest single-day selling since August 20, 2013. FIIs, however, still remain net buyers for the month, with purchases of $270 million. In Asia, the Hang Seng index fell 2.1%, while Japans Nikkei 225 and Indonesias Jakarta Composite lost 2.5% each. Major European indices also opened weak ahead of the US policy meet, with the FTSE 100, DAX and the CAC trading down anywhere between 0.01% and 1.35% at about 6.30 pm.

Bharat Iyer, MD & head of research at JPMorgan, observed that the sell-off in equities and currencies across EMs had been triggered by global factors so India could not be immune to it. Local issues have not played a meaningful role in Mondays sell-off, he said. Iyer expects FII flows to be reasonably stable this year though he believes it would not be appropriate to compare them to previous years when liquidity across the developed world was easy.

Ananth Narayan G, head of global markets at Standard Chartered Bank, said that the sentiment has turned somewhat cautious. Although the current account position is better, companies and banks remain leverage, so there is some stress, he said.

After foreign investors bought over $2 billion worth of bonds in the first 15 days of January, they sold $233 million worth of debt in the last three sessions. Over the past few days, EM currencies have been routed in the wake of weak data from China. The HSBC Markit Purchasing Managers Index for China showed a reading of 49.6 for January. Political uncertainties in countries like Thailand and Argentinas surprise devaluation of the peso have worsened the sentiment.

The Turkish lira fell by 5.9% on Monday followed by the Philippine peso and the Malaysian ringgit, both touching their lowest level since 2010. Other currencies that fell to multi-month lows included the Indonesian rupiah, Brazilian real and South African rand. The Argentinian pesos devaluation shook Latin American currencies and took down the Brazilian real by 2.3%.