In stark contrast to his hawkish stance on interest rates just last month, US Federal Reserve chairman Jerome Powell has now said that US rates were just below neutral. This was seen by global market participants as an indication that the rate hike cycle could be nearing its end.
While Powell’s swing from hawkish to dovish was too fast, it did soothe the nerves of battered emerging market currencies. Some of them such as the Indian rupee, the Turkish lira and Indonesian rupiah gained around 1% following his comments. Some emerging market (EM) equities surged as well. Besides, bond yields fell.
But it is too early to call this appreciation in EM currencies a turnaround. Powell’s comments are best seen as a mere sentiment boost. Economists say they wouldn’t be changing their outlook on the rupee only on the basis of this one comment. After all, there are many other moving parts as well. These include the ongoing trade tensions between the US and China, and movement in global oil prices.
Investors would be closely watching a slew of key global events slated in the following weeks. For instance, the outcome of the G20 Summit, to be held on 30 November-1 December, and whether or not the US and China call a truce on the trade front. Secondly, the meeting of the Organization of the Petroleum Exporting Countries (Opec) on 6 December would give investors a sense of where the oil output is and the outlook on demand. And then, of course, there is the Fed meeting on 19 December.
Based on what transpires at each of these events, one would gauge what lies ahead for emerging market currencies and stocks, say economists.
As for the rupee, easing oil prices have aided the Indian currency to stabilize. It has recovered 6.54% from its life-time low of 74.48 per dollar touched in October.
Even though these currencies appreciated on Thursday, on a year-to-date basis they are still down against the US dollar and have some ground to cover.