Following Germany's top court approval of the new EU rescue fund, the euro is on the rise. Will emerging market currencies follow suit?
The single currency is back from the brink. Relieved by the news that Germany's constitutional court will allow Berlin to ratify the European Stability Mechanism, traders have pushed the euro to a fresh four-months high. Along with the European Central Bank's new plans to buy unlimited amounts of eurozone government bonds, unveiled last week, the much-awaited decision will go some way to convince market participants that tensions are past their peak.
Will it also benefit Emerging Market currencies? In the short term, most probably. EM currencies typically strengthen when the 'risk-on' trade is back, that is when a perceived improvement in macro conditions induces investors to bet on riskier assets. Since traders' anxiety over worsening eurozone woes had decimated EM currencies earlier this year, with Brazil's real at its weakest since July 2009 and India's rupee at an all-time low, the vision of a more collaborative Germany can only help reverse the trend. It also looks like today's Dutch election will not bring a Eurosceptic party to power, removing another Damocles sword over Brussels' efforts to solve the crisis.
EM currency bulls may also find reasons to rejoice elsewhere in the world.Read More