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Prospects Daily: Sell-off in emerging market currencies continue, Fed tapers by another $10 billion, Turkey and South Africa hike key interest rates

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Financial Markets…Emerging market currencies were back under pressure on Wednesday even after several central banks hiked their policy rates with the sell-off leading Turkish’s lira and South Africa’s rand. The lira tumbled as much as 3.5%, paring all of its gains made after the country’s central bank’s midnight decision to hike interest rates aggressively, and was trading 0.4% lower at 2.26 per dollar in afternoon trading. The rand strengthened initially after South African Reserve Bank’s unexpected decision to raise its rates for the first time since 2008, but then fell as much as 3% against the dollar. The Russian ruble and the Mexican peso also depreciated at least 1.2%.

U.S. treasures and German bonds advanced as the sell-off in emerging-market currencies increased risk-aversion among global investors, boosting demand for safe-haven government securities. The yield on the benchmark U.S. 10-year yield tightened as much as 5 basis points (bps) to a two-month low of 2.27%, extending its yea-to-date decline to 32 bps. The yield on German 5-year note fell 4 bps to an eight-week low of 0.72%, and an auction of a new 10-year Bund met with strong demand.

High Income Economies…With economic recovery proceeding at a moderate pace amid continued improvement in the labor market, the U.S. Fed announced a second $10 billion reduction in its monthly bond buys, to $65 billion despite rising concerns about emerging markets.

Belgium's GDP growth accelerated from a 0.3% (q/q sa) increase in Q3 to a 0.4% rise in Q4, the fastest pace in almost three years, adding to evidence the euro area’s recovery is gaining steam. A breakdown of GDP components will be published in March.

According to preliminary estimates, Singapore’s unemployment rate, on a seasonally adjusted basis, held steady at 1.8% in Q4, unchanged from Q3 and lower than Q2’s 2.1%. There were around 635,000 persons without a job at the end of Q4, higher than 618,000 in Q3. For 2013, the average unemployment rate was 1.9%, slightly lower than the 2.0% recorded for 2012.

Developing Economies…East Asia and Pacific: The Malaysian central bank left its key interest rate, the overnight policy rate, unchanged at 3%. Although inflation has been gradually rising due to supply disruptions brought on by adverse weather conditions, the central bank stated that it expected moderating domestic demand and subdued external price pressures to temper the effect of these supply factors on underlying inflation.

Europe and Central Asia: Turkey’s central bank raised sharply key interest rates in a bid to bolster the lira and combat inflation. The rate increases largely exceeded market expectations. The one-week-repo rate was more than doubled to 10% from 4.5%; the overnight lending rate was increased to 12% from 7.75%; and the overnight borrowing rate was raised to 8% from 3.5%.

Sub-Saharan Africa: South Africa’s Monetary Policy Committee raised its key benchmark interest rate, the repurchase rate, by 50 basis points to 5.5% with the aim to support the rand and contain expected inflationary pressures. This decision marked the first rate hike in nearly six years, during which the repurchase rate had been left unchanged at 5%, and followed rate increases by the central banks of Turkey and India to combat weaknesses in their currencies.

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