Emerging market currency 'contagion' spreads
By: Katrina Bishop | Deputy News Editor, CNBC.com
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Emerging market currencies continued to take a beating on Friday amid growing worries about political upheaval, slowing growth and U.S. monetary policy, prompting central bankers and policy makers to scramble for a response.
Turkey's lira hit a new record low against the dollar and Argentina's peso was down 14 percent on Friday against the dollar.
Argentina's government responded by loosening strict foreign exchange controls. Earlier this week, the country's central bank abandoned its policy of intervening in the foreign exchange market, which pushed the currency lower.
The Indian rupe fell to a two-month low against the dollar, and traders said the central bank had intervened in the currency markets, according to Reuters.
The dollar strengthened to 2.33 against Turkey's currency, and investors piled out of the South African rand and the Indonesian rupiah, which fell to a two-week low against the dollar. Meanwhile, the Australian dollar, a favorite of the carry trade, fell to $0.8681 – its lowest level in three-and-a-half years.
Emerging markets to turn the tide in 2014?
Easing taper concerns and currency depreciation are some of the reasons why Peter Harper, Director, Distribution at BetaShares Capital feels that emerging markets can shrug off last year's lacklustre performance in 2014.
Tim Ash, head of emerging market research at Standard Bank, said people had fallen out with emerging markets.
"The story is about fundamentals — so many emerging markets have dodgy fundamentals," he told CNBC. "You've got Turkey, Brazil, Argentina, Egypt — everyone's got problems."
But he stressed that although this was the broader picture, Friday's moves were "pure contagion."
"Even the good guys that investors like — like Mexicio and Poland — are being pulled lower," he added.
"Markets are taking a long hard look at a number of vulnerable countries, notably Turkey, and don't like what they see in terms of the credibility of the policymaking regime," Nicholas Spiro, managing director of Spiro Sovereign Strategy said.
(Read more: Emerging marketcurrencies the Fed can't touch)
"The domestic weaknesses of emerging markets - which last year's 'taper tantrum' glaringly exposed - are becoming more pronounced."
The Federal Reserve's bond-buying program which boosted risk sentiment and emerging market currencies since 2009 is slowly being unwound.
Speculation of Fed tapering in 2013 hit emerging markets hard, with currencies of countries including India, Turkey, Russia and Brazil coming under intense pressure in what become known as the "taper tantrum."
No slowdown in emerging markets: Prudential CEO
Tidjane Thiam, CEO of Prudential, says he remains positive on emerging markets and does not see a slowdown in those countries.
Benoit Anne, head of global emerging market strategy at Societe Generale, told CNBC the market's "panic mode" was directly linked to the Fed.
"We have huge psychological fear that is going to emerging markets, despite a global environment that hasn't changed that much," he said.
"My bias at this stage — although it's a bold one — is that this is all about the credibility of the Fed with respect to its forward guidance. This fear that the Fed is going to tighten quicker than expected is translating into emerging markets."
The U.S. central bank has promised that it will not raise interest rates until unemployment hits 6.5 percent - but some analysts are concerned that rate hikes could come sooner than expected.
(Read more: Sit up and takenotice, Aussie pain is here to stay)
But Anne added these recent moves were likely to be more temporary.
"It's a matter of weeks rather than the whole year of 2014 as a total write-off for emerging markets," he said. "Although it will take the Fed re-establishing its credibility towards forward guidance before we see respite in emerging markets."
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