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A message similar to the message “we will go through a painful period to reduce inflation” in the speech of US Federal Reserve Chairman Jerome Powell in Jackson Hole came from the officials of the European Central Bank (ECB) who spoke at the symposium on Friday. Experts are of the opinion that the stable termination of monetary expansion after the 2008 crisis will increase the pressures on the currencies of developing countries in the coming period. However, it is evaluated that emerging economies, which started to tighten their monetary policies together with the Fed – even before the Fed – will be more ready than in previous tightening periods. While the dollar index is moving towards 109 levels after Jackson Hole, the ECB’s hawk message saw above 1 again for a short time. EuroDue to the energy crisis, a very strong rise is not foreseen in Turkey.
ING Bank Forex Strategist Francesco Pesole thinks that the stronger dollar after the Fed’s statements means more pressure for emerging market currencies. Pesole “A hawk pricing strengthens the dollar. This means more pain for emerging market currencies, which have fallen by about 5 percent this year.”
According to the data of the International Monetary Fund, in an analysis in the Wall Street Journal, developing and developing countries foreign currency It is reported that the reserves have melted 379 billion dollars from the beginning of this year to the end of June. In the news, it is noted that developing countries have sold dollars from reserves at the highest rate since 2008, and the assessment is made that “This increases the risk of default waves in the most fragile economies”.
‘Developers’ tightening with the Fed are more ready
Many emerging economies in Latin America and Asia even before the Fed interest started to increase and tried not to lag behind the Fed in the fight against inflation. According to an analysis in Reuters, emerging economies that tightened their monetary policies even before or in parallel with the Fed, entered this tightening cycle of major central banks that began after COVID-19 and the war.
Turkey remains the exception
Turkey, on the other hand, continues to be an exception with its central bank, which did not start an increase in interest rates despite inflation exceeding 80 percent – on the contrary, it decided to cut 100 bps in its last meeting. This year dollar The TL, which lost 27 percent against the dollar, is only 1 percent below the historical record level of 18.4.
“Exception in response to Indian Rupee yield curve”
Goldman Sachs predicts about $30 billion of new capital inflows to India, and an analysis on FX Street highlights that the rupee is the only emerging currency to rise as a result of the inversion of the yield curve in US Treasury bonds. Hungarian Forint, Singapore Forint, Korean Won, Brazilian Real, Mexican Peso are the currencies that have been most sensitive to this movement in the past when recession is priced in the yield curve. In the analysis, it is noted that the only rising currency among the Indian Rupee, Malaysian Ringgit and Turkish Lira trio, which is normally less affected by this movement, is the Indian Rupee.
100 bps increase expected from ECB
Isabel Schnabel, from the ECB board of directors, stressed that bigger concessions will be needed to fight inflation this time compared to previous tightening periods, and said, “Growth and jobs may have to take a hit.” In addition, Schnabel and French Central Bank Chairman Villeroy de Galhau said in Jackson Hole on Saturday that monetary policy may need to remain tight “for a long time”, as did Fed Chairman Powell. According to Villeroy, he is of the opinion that the neutral interest rate will be 1 to 2 percent, which does not cause contraction but will not bring growth, and said that “This level will be reached before the end of this year”. Villeroy also pointed out that all the will and capacity of the bank will be used to achieve the ECB’s target.
Euro may start the week strong but…
This situation strengthened the expectations of a 100 bps increase from the ECB in the markets, and the euro/dollar parity may start the week on a bullish note with these expectations. On the other hand, a long-term strengthening is expected in the dollar and energy A recession due to the crisis continues to suppress all European currencies, especially the euro.
“There is no pressure from old cycles on those who develop”
Simon Harvey, Director of Forex Analysis at Monex Europe, says Fed Chairman Jerome Powell’s speech is relatively in line with expectations. According to Harvey, the reason for the rise seen in emerging country currencies after Powell’s speech in Jackson Hole is that a hawkish speech came in line with expectations. “They will try to steer the market to the idea that they will slow the rate of interest rate hikes, but they will defeat this with the idea that interest rates will stay high for longer,” Harvey says. Stating that there is no pressure on emerging market currencies like in previous tightening cycles, Harvey said, “When US Treasury bonds are analyzed, we see that more recession ideas are priced in. However, we also see the idea that Fed policies will not put the same pressure on emerging market currencies, which are sensitive to the risk movement in bonds. In addition, in 2022, when major central banks such as the Fed, ECB and the Bank of England (BoE) began to tighten, emerging stock markets almost wiped out all their earnings by Jackson Hole.
Bitcoin is under $20,000, crypto volume is under $1 trillion
Messages from the Fed and ECB brought a new wave of sales in cryptos, as in all risky assets. While Bitcoin again fell below an important psychological limit of $ 20 thousand, the cryptocurrency market, which exceeded $ 3 trillion in 2021, again fell below $ 1 trillion. Bitcoin was last traded below $20,000 on July 14. The last week’s decline has exceeded 7 percent in Bitcoin and 9.5 percent in Ethereum. The two most voluminous coins of the cryptocurrency market, Bitcoin and Ethereum, have lost 58 percent and 60 percent, respectively, since the beginning of the year.