Emerging Currencies Tumble in Expectation of Higher Core Rates

As the South African rand fell more than one percent on Tuesday, investors sold down assets deemed most vulnerable to tighter global monetary conditions. Emerging currencies have suffered hefty losses as a result. 

With the U.S. Federal Reserve set to unwind its balance sheet, global markets are set to face a squeeze due to the American influence in the coming months.

"A couple of things are changing. If you look at most of G10s, there is a rise in real yields and it effectively indicates the period of abnormally low interest rates is coming to an end. That's leading to reappraisal of what's good value in G10 as well as emerging markets," said Peter Kinsella, head of research at Commonwealth Bank of Australia

"Second is oil prices - OPEC are talking of further supply cuts which shows they are finding it hard to balance markets. Falling oil prices are net-net positive for G10 and net-net negative for emerging markets."

Kinsella said, however, that while currencies were the first line of defence, emerging equity and debt markets were supported by valuations which are less rich than during the 2013 selloff.

Societe Generale strategist Regis Chatellier mentioned he adjusted his portfolio in favour of shorter-duration emerging debt especially in central Europe, to guard against the rise in core rates. "After such a long rally a reduction in balance sheets is going to hurt a bit," he said.

Read more at Reuters.