Politics drive latest moves in EM currencies

In an otherwise quiet month for EM markets, the sharp falls in the Mexican peso and Turkish lira have stood out. In each case, the triggers have been different – the 7% fall in the peso against the dollar since the start of the month reflects concerns that Nafta talks are stalling, while the 6% drop in the lira was triggered by a diplomatic spat between Turkey and the US. The common link, however, is that it has been politics, rather than economics, that has been the main driver of market moves. Indeed, it is striking that the commencement of balance sheet reduction by the Fed – which up until recently had been viewed as a key threat to emerging markets – has barely caused a ripple in EM markets. Both the lira and the peso have stabilised in recent days, but we think the experience of the past few weeks holds lessons for the next six months, with market moves in EMs being driven by local developments rather than the actions of central banks in advanced economies.