Emerging Market currencies hurt by risk aversion

Forex markets punished emerging market currencies this week, due to heightened economic and political risk. Many traders had piled into carry trade positions, selling low-yielding, stable currencies in favor of higher-yielding, but more volatile currencies. After a string of negative political and economic developments, many traders unwound their positions and moved back into the more stable currencies. After all was said and done, the currencies of Turkey and South Africa had declined more than 3%, while those of Brazil and Mexico declined by almost 2%. However, analysts now feel the sudden drop was nothing more than a long overdue correction, and remain bullish on emerging markets. Daily News and Analysis Online reports:

Post that shake-out, high risk currencies enjoyed a strong rebound. Low interest rates encouraged speculators to re-enter carry trades and build up large speculative positions, going short on the Yen and Swiss Franc.

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