EM currencies to continue bullishness on Fed reprieve

FXstreet.com (Barcelona) - Emerging market currencies saw big gains yesterday when the Fed made the decision not to change its current monthly asset purchase programme, maintaining open-ended QE at 8.5 percent.

The news that the Fed would not be doing anything to tighten the liquidity on which many emerging markets have come to rely helped trigger domestic currency buying. IDR non-deliverable forwards tracked lower on the Fed news and we could see a continuation of the short-term Rupiah bullishness. IDR had been left significantly exposed by BoP imbalances, with cheap cash from US monetary expansionist policies helping to give liquidity.

It was a similar story across the more exposed South East Asia currencies, which will be breathing a sigh of relief that any tapering plans have likely been pushed into 2014, with Bernanke stressing that 6.5 percent is the upper threshold at which the Fed might consider a move away from its ultra-loose monetary policy, rather than a trigger point for any hikes.

The Malaysian Ringgit gained 2.6 percent against the dollar, with MYR/USD trading at 3.1495.

Given that EM currency trading broke down on typical liquidity issues following yesterday’s Fed announcement, don’t be surprised to see further upside in today’s sessions.