Forex Flash: Emerging markets central banks reluctant to alter rates – UBS

Many asset managers will tell you that last year investing in emerging markets reaped healthy rewards, both in FX and duration. By definition, on the FX element alone, the means emerging market central banks were more reluctant to intervene. Firstly, according to Research Analyst Gareth Berry at UBS, “early risk aversion and fears of declining trend growth led to capital outflows in many markets, notably China, such that pressure limited reserve accumulation.”

Secondly, especially in Q3, even as growth in emerging markets rebounded and attracted inflows, central banks probably realized that in the short term at least, fighting G10 quantitative policy was futile. “On the contrary, allowing more currency appreciation to fight QE-driven price-push inflation may be desirable.” Berry adds.

The Chinese authorities were quite clear on this point in a December statement making the case for greater currency volatility. However, emerging market central banks probably did not expect that in late Q4, G5 central banks would take quantitative measures to a new level, led by the US, Japan and the UK; cue usual talk of currency wars. In comparison the ECB looked outright hawkish. The result was a virtuous cycle for the euro.