What Will Stable U.S. Interest Rates Do for Emerging Market Currencies?

The Fed met and put off any further increases in interest rates until at least June. What will stable U.S. interest rates do for emerging market currencies? Bloomberg Business reports that emerging market currencies hit a 4 month high on the news of stable U.S. interest rates.

Emerging markets rallied as the Federal Reserve’s dovish turn boosted appetite for riskier assets and Brent crude’s advance above $40 a barrel pushed energy stocks to a four-month high.

Brazil’s real and Colombia’s peso led a gauge of currencies to a four-month high after U.S. policy makers signaled two interest-rate increases this year, down from four forecast in December. Russia’s ruble climbed for a second day and South Korea’s won advanced the most in four years. The MSCI Emerging Markets Index of equities headed for its highest close in three months as stocks of energy exporters from Saudi Arabia to South Africa rallied with oil. The Ibovespa rallied to the highest level since August.

The prospect of higher U.S. interest rates had put a damper on currencies across the board. But now the Fed has signaled that it will probably only raise rates twice this year and the result was 3% bump in currencies like the Colombian peso.

Where Are Emerging Market Currencies Going Next?

A year ago we wrote about trading the Colombian peso.

In 2012 the Colombian peso out distanced all other currencies versus the US dollar. Now trading the Colombian peso has to do with anticipating when the currency will hit bottom versus the dollar and when the price of crude oil will come back up. In December Bloomberg reported that the peso leads global losses due to the massive fall in oil prices.

Colombia’s peso fell to a five-year low and led losses among world currencies as the price of crude oil, the Andean nation’s biggest export, sank to a five-year low.

The peso sank 2 percent to 2,396.69 per dollar at the close in Bogota, the weakest since April 2009. The drop was the biggest among 31 major currencies tracked by Bloomberg. The peso has tumbled 12 percent in the past month.

That was when Brent crude fell below $65 a barrel. Today Brent crude contracts for March 2015 trade at $56.09 a barrel and one dollar buys you 2,406.5 Colombian pesos. The last months have been active for those trading the Colombian peso. What does the future hold?

The Colombian Peso is tied to the price of oil and the strength of the US dollar. When oil goes up so does the peso but when the dollar strengthens the Colombian peso falls. Right now the dollar is stable due to the Fed decision on interest rates and oil has gone up slightly. But what does the future hold for emerging market currencies such as the Colombian peso? The dollar will likely rise in June when the Fed nudges interest rates a bit higher. However, there is a glut of oil and although prices could rise a bit there is no early return to the glory days of $100-a-barrel oil. Until then the Colombian peso is probably going to languish nearer to 3,000 to the dollar than 2,000 to the dollar.