How European Central Bank (ECB) Quantitative Easing (QE) moved the markets, including the rand and the RSA Yields. Is this good news for emerging market economies?
The unexpected scale of the intended QE in Europe announced on Thursday moved the markets. Most conspicuously it weakened the euro vs the US dollar. Such weakness must be good for European exporters and thus for growth prospects in Europe regardless of how much more lending European banks will do with their pumped up cash reserves. Some stimulus from a weaker euro will add something to the demand for bank credit, which has been as weak as the supply of bank credit from European banks – hence the case for QE.
US dollar strength and euro weakness was an entirely predictable response to what became a wider interest rate spread in favour of US Treasuries over Bunds.
The rand not only gained against the euro but also strengthened against the US dollar on the QE facts.
This strength was however not confined to the rand. It was also extended to many of the other emerging market currencies. The rand lost a little bit of ground against the Brazilian real and gained against the Turkish lira. It also held its own against the Mexican peso and Indian rupee as we also show below. Thus euro weakness vs the US dollar extended to emerging market currencies, including the rand.
The strength of the rand vs the euro was linked with further strength in the RSA bond market. We have alluded in previous notes to the recently strong relationship between the rand/euro and RSA long bond yields. This trend of declining RSA yields associated with rand/euro strength held up strongly over the past few days. It indicates that the lower euro interest rates and a wider spread in favour of RSA (and presumably other emerging market) bond yields also attracted flows of funds out of or away from Europe – enough to move emerging market bond yields lower.
It was not only emerging market bond markets that seemed to benefit from changes in flows of funds in response to ECB QE. Emerging market equity markets, including the JSE when measured in US dollars, also outperformed the S&P 500.
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