FX Alpha 21 January 14

High beta EM currencies hitting a BRIC wall?

Markets will now focus on idiosyncratic policy responses by national central banks.

Since the beginning of the year markets have treated higher beta EM currencies, in particular TRY and ZAR, with a high degree of suspicion. In part this is merely a continuation of a trend from last summer, but nonetheless the weakness seen so far this year is disconcerting. Further weakness comes despite modest falls in US yields following Fed tapering in December. Thus far it is clear that markets are not following previous patterns of announcement effect vs. implementation effect of QE policies (where asset prices moved before QE programmes were actually implemented). Lower beta EM currencies however have fared reasonably well during this period; therefore we cannot consider current price action as being part of generic EM weakness but rather weakness that is specific to the higher beta complex. To improve the situation, it requires either i) a significant fall in US yields or ii) idiosyncratic policy responses by national central banks.
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