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29 Jan 2014
Turkish CB move favours perception of further Fed taper
FXstreet.com (Bali) - The decision by the Turkish central bank to lift rates by 4.25 bp may have some important implications on how the market perceive Wednesday's FOMC tapering decision.
One of the elements that the Fed will surely factor in before continuing the taper cycle, other than the state of the domestic economy, is going to be global financial stability. Recent selling hysteria in emerging markets has probably not sit well for members at the helm of the Fed, as the implications of taper result in far reaching effects around the globe as clearly seen by the EM selling.
However, the move by the Turskish central bank to lift rates 2% above market expectations (from 10% consensus to 12%) may act as a symbolic signal that emerging markets will dutifully do whatever it takes to limit outflows of capitals, even if that results in an extraordinary 425 bp rate hike as seen.
So, assuming that the action taken by the Turkish central bank makes further ‘taper’ a decision easier to take, combined 'risk on' and US Dollar strength, two terms normally not walking hand-by-hand, may have to be re-assessed.
The reaction seen so far in trades such as EUR/USD suggests that USD strength on further taper expectations may be playing out (also EUR outflows returning to TRY may be causing the decline), while the USD/JPY rally also justifies the assumption of a more 'risk on' friendly market profile.
One of the elements that the Fed will surely factor in before continuing the taper cycle, other than the state of the domestic economy, is going to be global financial stability. Recent selling hysteria in emerging markets has probably not sit well for members at the helm of the Fed, as the implications of taper result in far reaching effects around the globe as clearly seen by the EM selling.
However, the move by the Turskish central bank to lift rates 2% above market expectations (from 10% consensus to 12%) may act as a symbolic signal that emerging markets will dutifully do whatever it takes to limit outflows of capitals, even if that results in an extraordinary 425 bp rate hike as seen.
So, assuming that the action taken by the Turkish central bank makes further ‘taper’ a decision easier to take, combined 'risk on' and US Dollar strength, two terms normally not walking hand-by-hand, may have to be re-assessed.
The reaction seen so far in trades such as EUR/USD suggests that USD strength on further taper expectations may be playing out (also EUR outflows returning to TRY may be causing the decline), while the USD/JPY rally also justifies the assumption of a more 'risk on' friendly market profile.