After Wednesday when the US Federal reserve abstained from pulling back its financial stimulus program, the performance of the dollar against emerging currencies will be tied more than ever before to the upcoming US economic data. Now currencies most sensitive to a reduction in Federal Reserve asset purchases such as emerging-market currencies, will rely heavily on upcoming U.S data, said Steven Englander, global head of G10 FX strategy at Citi, in an interview.
After the decision of the Federal Reserve various emerging market currencies such as the Indian Rupee, the South African Rand and the Turkish Lira increased very quickly against the dollar. Many of the emerging market currencies have had their worst year during 2013. The reason for this was the fear that Federal Reserve will taper its bond buying program. These countries rely heavily on foreign investments which help them fund their large current account deficits.
The ultra-loose Federal Reserve policy has so far sent a lot of investors on the emerging market countries in a search for higher yields, making their economies one of the biggest beneficiaries of the Quantitative Easing program.
“The signal today is that liquidity’s back. And so all these currencies that got pounded the last couple of months, their economies aren’t any better but the market is more convinced the liquidity is there,” Mr. Englander said.
He warned currency traders and investors that if the US economic data surprises on the upside emerging market currency may sharply decrease as the fear of Federal Reserve tapering its stimulus return on the daily agenda.