Emerging markets stalled their declines as certain central banks raise interest rates to curb the rising inflation and others prepare to do the same. The Japanese Yen falls as risk aversion fades. The U.S. Dollar rises, supported by more possible cuts on its stimulus program by the FED during tomorrow’s meeting.
It seems like markets over-reacted to the fall in emerging markets and some savvy investors took the opportunity to buy into fear and risk aversion. The central banks in emerging markets are acting now to prevent further losses on their local currencies. India’s central bank has been the first one to unexpectedly raise its interest rate by 0.25% in an attempt to curb inflation. The next one to follow suit may be the Turkish central bank, which announced a possible rate hike to help support the Lira.
The Turkish Lira has obviously jumped higher with the possible rate hike by its central bank, which has been rumored to be around 2.25%, leaving the interest rate at 10%. This is really an aggressive hike in interest rates by the Turkish central bank. Other countries like Brazil, Indonesia, and South Africa are also pondering the possibility of raising their interest rates, especially because these economies depend a lot on foreign investment and are feeling the greatest blow of capital flows heading out of their economies and back to the United States.
We should also add that China helped prevent a possible debt default by one of its biggest lenders and injected more capital into its markets to help stabilize its economy. For now the plan is working and China seems to be getting back on track. This has also helped emerging markets recoup their recent loses.
The Yen, which had enjoy a recent rally due to risk aversion is now retracing its earnings as risk starts fading and markets try to go back to normal conditions. We have already mentioned that the Yen is usually used as a safe haven asset during times of uncertainty. The Yen fell 0.7% versus the Dollar and 0.3% versus the Euro.
Most likely, the U.S. Dollar will continue enjoying a rally as the FED prepares for its FOMC meeting tomorrow, where according to analysts, the FED may decide to lower their monthly asset purchases even more. So far, the FED decided to cut their asset purchases from 85 billion Dollars a month to 75 billion Dollars a month. But now, the market is expecting another cut to 65 billion Dollars a month in asset purchases.