The Fed FOMC meeting wrapped up on Wednesday 28 October 2015. While no interest-rate hike was introduced, the Fed made no mention of slowing global growth in its statement.
A December rate hike is a very real possibility!
The Latest Fed FOMC Decision Accelerates EM Currency Declines
The Fed FOMC meeting held on the 27/28 October 2015 wrapped up with no decision to hike interest rates yet. However, unlike the previous meeting in September where there was an allusion to the weakness in the global economy, this time round no mention was made of global economic conditions. This means that the current interest rates will remain in a tight range between 0% and 0.25% for the next month. Currency traders reacted swiftly to the news, with the dollar rising as a result of the absence of global market weakness sentiment. Typically, the USD would rally if the Fed decided to increase interest rates, since this would make the greenback inherently more attractive vis-a-vis a basket of currencies. However in this particular case, the likelihood of an imminent rate hike was enough to bring out the dollar bulls.
How Are Emerging Market Currencies Reacting to The Latest Fed Decision?
The last time the Fed decided to keep interest rates in the current range, EM currencies rallied. The rationale behind the September/October surge was the fact that Federal Reserve Bank policymakers had felt that the US economy was unable to sustain a rate hike given weakness in the global economy. At the time, it was evident that China and emerging market economies were in the throes of severe contractions. Commodity prices had plummeted to multi-year lows, with Brent crude, WTI, copper, steel, iron ore, coal, gold and silver all feeling the pinch. These are the chief exports of many emerging market countries. As a result of plunging demand in global weakness, the Fed was loath to raise interest rates. This delay afforded a respite to emerging market currencies like the South African Rand, Brazilian real, Turkish lira, Venezuelan Bolívar and the Chinese yuan.
USD Performance after Fed Decision
Now that the October Fed results have come out, there is less optimism for emerging market currencies. The likelihood of a December rate hike is growing, and this is evident in the concern for EM currencies with the MSCI emerging equity index retreating sharply to its lowest level in three weeks. The MSCI emerging equity index plunged 1.4% after the Federal Reserve Bank announcement was made. As a result, the US dollar index rallied. Now, there is growing concern that monetary policy measures in the US will lead to an acceleration of capital outflows from emerging market countries. The dollar made strong gains overall against a basket of currencies, with the following exchange rates recorded on Thursday, October 29: EUR/USD at 1.0987, USD/CLP at 688.8800, USD/ZAR at 13.8941, USD/NOK at 8.5598, USD/SGD at 1.4035.
The Fed decision was particularly difficult for equities markets in the Asia-Pacific region, Europe and beyond. There is tremendous volatility taking place in emerging market economies, as anxiety about an imminent rate hike weighs on market sentiment. Jakarta stocks lost as much as 3%, Hong Kong dropped 0.6%, Russian equities dropped approximately 2% and the South African stock market saw losses as deep as 1%. The currencies of these countries fared just as poorly, with the ruble losing 0.8% against the dollar and the rand losing 0.2% against the dollar. South Africa is in a unique situation in that it relies on foreign direct investment and foreign loans in order to finance the deficit on its current account. That means that the South African economy needs to pay for the dollars it receives. Russia, Norway and other oil-producing countries are stuck in a rut, given the persistently low crude oil price. As a result, their currencies are plunging too.
Author Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company –InterTrader.