It's Still All About The Fed

REUTERS/Jason Reed

We've just seen three unexpected rate hikes from emerging market central banks. First was India, then Turkey and finally, South Africa.

While these rate hikes have moved markets, Bob Savage writes in his latest Track Research note that "the key driver today isn't the failed reaction of the TRY to rate hikes from the central bank but more the contagion of the FOMC continuing to taper its QE."

Instead he thinks investors will be watching money flows in the coming days instead of rate decisions "to really determine what is safe and what is not."

Meanwhile he says there are are three ways that emerging market economies can fight off potential outflows from further Fed tapering.

1. "Use their FX Reserves to fight the contagion fears. This works if you have them - and China, Korea stand out but they are seeing more FX gains over the last 3 months rather than weakness."
2. "Use rate hikes to force a "carry" play. Turkey has tried this point. Malaysia's Bank Negara decided against it last night. Neither central bank is happy with their FX. The "carry" trade only works when volatility is low enough to make the return look better than the risks."
3. "Control capitals to block the outflows of money - this move is the scariest outcome for any EM crisis and its been clear that extreme moves like the Argentine default back in 2001 doesn't really work in fixing an economy. The risk is that political leaders go to this option when reserves and rates fail to work."

We get the latest FOMC meeting announcement at 2 p.m. ET today.