EMEA Weekly: Tough Week For Emerging Markets

This has been a hard week for emerging markets as Fed tapering concerns and fears over an early US-led military strike on Syria sparked risk aversion, sending some of the emerging market currencies to new all-time lows. Even though the pressure on the emerging market currencies calmed down somewhat over the past 24 hours as the idea of an early military strike was abandoned, we believe the relief could be short lived. Furthermore, emerging market central banks continue to prop up their local currencies, intervening directly in the FX market.

One of the currencies hit hardest this week has been the TRY, which took a beating, reaching a record low against the USD.

We believe historical evidence suggests the possibility of an even greater correction in the TRY, especially in a risk-off environment with political unrest, lurking Fed tapering, continuing emerging market turmoil and the situation in Syria. With yields and rates rising, the TCMB cannot follow its policy of FX intervention and, together with a considerable current account deficit, this is likely to start weighing on the TRY. Additionally, uncertainty about the political situation in Turkey ahead of next year's elections could pose further downside risk to the TRY. Having said this, levels for the TRY are now trading moderately weaker than our fair value.

Hawkish NBP remains on hold next week

When the Polish central bank's Monetary Policy Council meets next week, it seems likely to us that it will decide to keep the central bank's key policy rate unchanged at 2.5%. This is also the consensus expectation.

Given that growth remains well below potential growth and inflation remains very subdued in Poland, we think the NBP has room for further monetary easing. However, the majority of members of the Monetary Policy Council who have the final say on Polish monetary policy do not agree with this assessment. This has been confirmed further this week by comments from several Polish central bankers, including NBP governor Marek Belka, who signalled that the NBP is likely to remain on hold for some time to come.

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