EM jitters Continue
It has been a hard week for emerging markets so far.
Despite very aggressive monetary tightening from the Turkish central bank on Tuesday and more 'normal sized' rate hikes by both the Indian Reserve Bank (also on Tuesday) and the South African Reserve Bank (on Wednesday), global emerging markets remain quite shaky and it is certainly far too early to conclude that the rate action by the emerging market central banks more fundamentally has stabilised the emerging market currencies.
Overall, it is clear that a number of emerging market currencies are now trading at fundamentally weak levels and the rate hikes and expectations of more rate hikes from other emerging market central banks overall might help to stabilise the emerging market currencies. However, it should also be noted that the tightening of monetary conditions to prop up emerging market currencies will potentially have very significant negative effects on emerging market growth in general. Furthermore, we are sceptical that we will see any fundamental rebound in emerging markets before we get more transparency on the outlook for the Chinese economy and the Chinese financial system and this could take some time. Therefore, caution is still very much warranted.
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