Taper Tantrums or the Start of an Emerging Markets Forex

Taper Tantrums or the Start of an Emerging Markets Forex

29 January 2014  –  Unwinding the US Federal Reserve’s quantitative easing programme was never going to be easy and it has barely started and some emerging market countries are already running into trouble.

So far the worst hit countries also appear to be victims of their own internal problems, such as high current account deficits and political turbulence. In effect, ultra cheap money from the Fed was papering over some serious cracks – similar to what the EUR was doing for years for peripheral Eurozone countries.

Update:  Taper 2: Fed announces $10 billion taper – USD advances

It would seem perfectly natural for emerging market currencies to fall against USD as winding down quantitative easing is a form of monetary tightening. But will it reveal deep rot within some of those countries? For some yes. And in this age of global inter-connectivity that potentially matters a lot.

Trying to stop USD/TRY slide by hiking interest rates

USDTRY January 2014 forex chart QE tapering foreign exchange emerging markets

Global growth & China are key

The two big external factors as to whether recent emerging market currency volatility is just a wobble or the beginning of a bigger crisis – is world economic growth and China.

If the main stimulus for the global economy shifts from ultra-easy money policies towards real growth – then the currencies of the better managed emerging market countries should bounce back. The others will have to go through a painful readjustment process, but will be able to do so in a less hostile global economic environment.

China is also key. In part because it is seen as a proxy of developed country growth (because they buy its exports) and also because it’s a huge economy in its own right and a major consumer of raw materials. So far it has only suffered an economic slowdown.

But one thing that is for certain – the Fed’s transition towards a normalised monetary policy will continue to create volatility. The job of central bankers will be to ensure that this volatility doesn’t feed on itself and turn into a systemic threat, such as an emerging market crisis.

So far the odds are on containment – mainly because the world economy is recovering. But that could change at any moment.

By Justin Pugsley, Markets Analyst MahiFX Follow MahiFX on twitter

Justin Pugsley

Justin Pugsley

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice