Gold rebounded as renewed volatility in emerging markets heightened risk aversion once again. The yellow metal has retraced more than half of the retreat from Monday’s high at 1276.55, to reach an intaday high of 1269.00.
Late yesterday, the Central Bank of the Republic of Turkey (CBRT) dramatically hiked interest rates in an effort to underpin the plummeting lira and slow the resulting inflation:
The Monetary Policy Committee (the Committee) has decided to adjust the short term interest rates as follows:
a) Overnight Interest Rates: Marginal Funding Rate is increased from 7.75 percent to 12 percent, borrowing rate from 3.5 percent to 8 percent, and the interest rate on borrowing facilities provided for primary dealers via repo transactions from 6.75 to 11.5 percent.
b) One-week repo rate is increased from 4.5 percent to 10 percent.
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate is kept at 0 percent, lending rate is increased from 10.25 percent to 15 percent.
source: http://www.tcmb.gov.tr/yeni/eng/
The lira dutifully rebounded 9.5% from Monday’s record low against the dollar at 2.3898, but it would seem that a 425 bps hike to the overnight borrowing rate may not have been enough to stem the tide. By early New York trading the USD-TYR rate was back around 2.3200, with the lira giving back well over half of the recent gains.
The South African Reserve Bank (SARB) hiked their repo rate by 50 bps to 5.5%, as the rand tumbled to a new record low against the euro and a new five-year low against the dollar. As with Turkey, the rate hike only provided modest relief — of dubious sustainability — as emerging markets in general continue to fret over continued Fed tapering.
Will the Fed provide them with some mollification by holding off on further tapering today? There is some heightened speculation about that amid this renewed emerging market volatility. However, most analyst continue to think the Fed is committed to the path of incremental reductions to asset purchases. We’ll find out at 2:00PM ET when the FOMC policy statement is released.
As for emerging markets, well, they (rightfully) complained about hot money flows when the Fed was printing money like mad and now their reeling as the Fed scales back that printing. As the keeper of the global reserve currency, the Fed arguably has some responsibility to the rest of the world to maintain some semblance of stability in the dollar. At this point though, the Fed is rockin’ the emerging markets both coming and going, and angering a lot of countries in the process.
Black Swans have emerged from much more innocuous circumstances. For a comprehensive chronology of panics, mania, crashes and collapses from 400 BC to present, be sure to read Mike Kosares’ latest submission in his Black Swans, Yellow Gold series.
As policymakers in emerging countries flail about in an attempt to offset the actions of the behemoth Fed, they may just be making things worse. That could further intensify demand for safe haven assets such as gold.