Turkey, Brazil, Russia: after months of protesting that their money bought too much, country after country is now moving aggressively into the foreign exchange markets to support their currencies.
Turkey has bought a record $4 billion in lira over the last two months and Russia has tapped its foreign currency reserves for at least $20 billion since Sept. 1 to protect the ruble.
The goal in both cases is to artificially create a base for currencies that would otherwise be plunging as global capital flees risk markets for the dollar.
Poland, Malaysia, the Philippines, South Korea and Brazil are also either officially involved in the currency markets or rumored to be preparing to defend their money.
While intervention like this did contribute to yesterday’s 0.8% decline in the DXY or “dollar index,” the DXY is rebounding 0.56% this morning.
The move we saw yesterday in the emerging currency markets was exciting, but not organic.
We want to see these currencies move up on their own before we know that the institutional funds are gearing up for a return to these markets.
Until that happens, there is not much chance that capital flows out of the emerging world will reverse — or that a flood of new money will lift stock prices in Brazil, Russia or any of these countries.
Currency funds like the broad emerging markets fund CEW (quote) have started moving in synch with equity funds like EEM (quote):
The threat — and reality — of new currency intervention will help support CEW and its more specialized peers like ruble-linked XRU (quote) and Brazil fund BZF (quote).
But when we see these exchange rates edge up independently, we will know that the tone has changed.
Meanwhile, the natural flows here still favor a long dollar position like UUP (quote) over a short like UDN (quote).