Commentary: EM Blows Out, No Surprises from Fed Minutes

Today's Fed minutes held no surprises, but that didn't stop the market from selling EM currencies, and CAD and AUD in anticipation of a scale back of asset purchases next month.  After the minutes were release, the dollar extended gains against the above currencies.  The greenback also strengthened against EUR and CHF, but it was a subdued, with both pairs moving only about 30 pips in favor of the USD.  USD/JPY ground higher all day, moving up roughly 70 pips from 97.11 towards 98.  However, the real action happened in EM space.  USD/INR and USD/TRY hit all time highs today, and both the RBI and the Central Bank of the Republic of Turkey intervened in the FX market today.  The RBI sold USD 1.3 billion to satiate local demand for the greenback.  Turkey continues to tighten rates, and today announced that it will sell USD 100 million everyday until further notice.  Peru's central bank, which has in the past has intervened to calm FX markets in times of high volatility sold a record USD 600 million to prop up the Nuevo Sol.  Peru's economy, one of the most dynamic in South America has grown robustly over the previous few quarters though has slowed with the rest of the world economy in 2013.  Last year capital inflows pushed the Sol higher but uncertainty over US monetary policy has spooked investors causing a near 10 percent slide YTD.  Likewise, MXN and ZAR were both hit hard, sliding near nearly 3000 pips each against the dollar.  Neither the Bank of Mexico nor the South African Reserve Bank intervened in the FX market today.  

Today's developments has me reassessing my strategy somewhat.  While I still like Mexico's prospects in the year ahead, markets are obviously terrified of the abrupt end of QE.  Furthermore, MXN seems to be much more sensitive to taper fears than CHF, my funding currency.  The result is that hand wringing from the Fed causes CHF to weaken, but MXN to weaken more.  I have thus taken the step of become a net long USD by buying more USD/CHF than I sold of USD/MXN.  The result is that I can continue to be hedged against taper fears will still earning attractive carry of my MXN long position.  

Of final note is the dilemma facing Turkey, which is still coping with large current account deficit despite recent progress on this front.  Turkey, which must import nearly all of its energy for surface vehicles, will wind up with a higher gas bill if the Lira continues its downward slide.  However, unlike other imports such as consumer products, higher prices is unlikely to hurt demand for petrol.  Finally, Turkish consumer is likely to simply absorb the price spikes, especially since the economy has picked up steam in the last quarter. Turkey's already very high current account deficit is likely to increase with a stabilization of FX markets.  Rising inflation which is surging back up toward nine percent from 6.5 percent earlier this year also explains the very hawkish tone of the CBRT, which has now explicitly committed to stabilizing the lira and constraining credit growth.  Alas, while I feel Turkey's pain, it is unlikely that the European nation can do much without a coordinated effort from other world central banks.  Unless a crisis occurs and Turkey can convince the Fed to buy lira, TRY remains at the mercy of the markets.