“As a result of the reductions in quantitative easing in the U.S., capital is flowing from developing markets into developed markets, which has led to pressure on currencies,” the central bank said in the statement.
Now, this begs several questions:
1. We saw emerging market currencies get pummeled in August with the first worries about QE infinity being withdrawn, as the capital flows of printed/helicoptered money looked like they were going to be withdrawn. The whole QE experiment may have stopped the US economy from dying (as if that were ever a possibility), but it has left it on life support, with everyone worried what happens once the government unplugs the machine. And while policymakers in DC thought that they were doing the best thing for the US economy (doubtful), they also didn't care about the consequences outside the borders, which was a capital flow boom... with interest rates at nil in the US and advanced economies, the artificial money had to go somewhere, and that somewhere was emerging markets. How much do you want to bet that the policy response, led by ninnies like Joe Stiglitz, will be that capital controls are now necessary again?
2. The National Bank of Kazakhstan (NBK) has always been a bit of a rogue when it comes to policies; in my current position, I worked with them a few years ago looking at their response to the financial crisis vis a vis Ireland and Iceland. This move, which is much bigger than expected, may signal that they have a sense that things are going to go south quickly, and they want first-mover advantage. Or else, they really are doing such a dramatic move to strike at Russia?
3. How will this hit the ruble? As of right now, it's holding steady, but the ruble has already been in a bit of a free-fall. Is this a tit for tat between Customs Union members? Or is that in store?
4. What will this do for Ukraine? Does Yanukovych, even if he does hang on, want to put his perilously overleveraged, antiquated, and dilapidated economy in the middle of a currency war? The hryvnia is already in a free-fall of its own.
So this could be an isolated, regional effort that shows the difficulties inherent in the Customs Union project. Or it could portend something much worse for the global economy. Stay tuned!