Monday, January 27, 2014

'Risk-Off' Hits Emerging Market Currencies

Currency markets are bracing for another stressful week. Emerging markets have been under pressure after Argentina devalued its currency on January 23. Emerging market currencies, especially those with current account deficits,
are expected to remain under pressure ahead of a second Federal Reserve taper expected at this week’s policy meeting on January 29. This will also be the last meeting of Fed Chairman Ben Bernanke whose term ends on January 31. He will be succeeded by his deputy, Janet Yellen, who will assume the chair on February 1. Bernanke’s last day also marks the start of the Lunar New Year in Asia.
While this was deemed an “anything but BRICS” markets, there was no denying that the sell-off was not limited to emerging markets. Developed markets were not spared either. Although the fall in US stocks was similar to the first Fed taper last month, there were several things that suggested more risk aversion this time around. For example, the VIX volatility index surged strongly to 18.14 last week, well above the previous 16.75 high seen at the Fed policy meeting on December 18.
In contrast to last month’s meeting, the US ten-year bond yield is falling (not rising) into this week’s Fed meeting. In currency markets, there was a flight to safety into the Japanese yen and the Swiss franc.