Turkey’s hefty rate rise gave the lira only a fleeting respite. Traders scoffed at a smaller South African policy tightening. Foreign exchange traders look set to test central banks’ capacity to defend emerging market currencies.
When central banks of countries with beleaguered currencies increase policy interest rates, they are sending a message to foreign exchange traders: back off. But while bond traders in developed economies might be assuaged by nothing more than an assurance from the European Central Bank’s Mario Draghi, a mere pledge to do “whatever it takes” is inadequate for hard-headed FX types. They forced the U.K. to leave the European exchange-rate mechanism in 1992 – they are hardly going to wilt in front of Ankara or Pretoria.