TOKYO — This month’s rally in higher-yielding currencies is in danger of snuffing itself out.
Units including the Australian dollar and the rand have strengthened this month after the Federal Reserve held off raising interest rates last month, citing global market turmoil. The decision preserved their yield advantage over the US, fuelling the currencies’ recoveries from this year’s lows.
Here’s the catch: those gains are starting to contribute to the sort of calm policy makers would like to see before they act. That may rekindle the threat of a Fed liftoff. And such a prospect risks derailing the recovery, whipping up volatility, and starting the cycle afresh.
“If markets become complacent again, expecting the Fed will just keep interest rates lower for longer, they’re actually creating the conditions for the Fed to go ahead and start normalising monetary policy,” said Mansoor Mohi-uddin, a senior markets strategist at Royal Bank of Scotland in Singapore.
“That’s why I remain cautious about commodity currencies and emerging markets.”
It is a paradox that saw Australia’s dollar plunge to a six-year low of 68.96 US cents last month, before kicking off this month with a nine-day winning streak as futures showed the odds of a Fed rate hike by December receding. A gauge of emerging-market currencies has recovered almost all its losses since China devalued the yuan on August 11, gaining 4.4% since September 28, while an index of volatility has retreated from a three-and-a-half-year high.
The Australian dollar rose 0.1% to $0.7274c at 6.50am in London on Monday. The currency has advanced 3.6% this month. The rand gained 0.1% to R13.0754/$, surging 6% since September 30.
New Zealand, whose 2.75% benchmark rate is the highest among all major developed economies, saw its dollar transformed into the best-performing major currency over the past month, from being the biggest rich-world loser in the first nine months of the year. The Turkish, Brazilian and South African currencies have all rebounded from record lows.
“Emerging market and commodity currencies do seem unhealthily reliant on Fed procrastination,” said Sean Callow, a currency strategist at Westpac Banking. “The very factors that caused the Fed to hold off on a rate hike should worry (these) currencies the most.”
Fed policy makers said they put off the first rate increase since 2006 amid concern China’s slowing growth would spill over to other developing nations.