As the European Central Bank today lowered the interest rate on the main refi operations by 10bp to 0.15% and on the depo facility by the same amount to -0.10% offering abundant liquidity to banks, EMEA currencies reacted powerfully. However, it looks as though the effect is vanishing, especially in EMEA currencies with weak carry opportunities. In the end, we see that what matter for EMEA FX rates in the medium term are fundamentals and geopolitical winds.
In Eastern Europe, while they gained against the euro, the Czech koruna, Polish zloty and Hungarian forint were sudden losers against the US dollar as more 'carry attractive' currencies gained. The best performers following the ECB's decision have been currencies such as the Russian rouble and Turkish lira. Tightening monetary policies in Russia and Turkey make the shift from the EUR to these currencies more attractive. While we have seen immediate strengthening of EMEA currencies with large carries, up to 0.65% in the rouble and similar in the South African rand against the USD (ZAR/USD) and even stronger against the EUR (ZAR/EUR), the effect almost vanished within two hours in post-decision trading. A comparable thing happened to Eastern European currencies, which returned to their old levels even more quickly.
Despite several surprises from the ECB, we do not see any significant effect on money base expansion, which could direct additional new liquidity into EMEA assets, for instance. Today's measures seem to be credit policy tools, not monetary, and increased lending will go to non-financial corporations, though we do not expect this to have a broad effect on financial instruments in emerging markets despite the apparent divergence in monetary policies between the ECB and its peers in EMEA.
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