EM currency mayhem extends into Monday

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SummaryWeak China data, Fed taper fears make investors risk averse

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 country’s 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 Africa’s rand dropped versus all but two of its 16 major peers and South Korea’s won declined for a sixth day, Bloomberg reported, adding that Turkey’s 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 FOMC’s outcome on Wednesday. With the RBI widely expected to hold rates, currency market players believe the Fed’s 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 Japan’s Nikkei 225 and Indonesia’s 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

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