For those of you who are a bit behind, emerging market stocks, bonds, and currencies have been getting slammed this year.
“The proximate cause of all these bloodbaths in emerging markets is the declaration by Fed Chairman Bernanke in mid-May that the Federal Reserve would begin to “taper” its purchases of securities should the U.S. economy continue to recover,” said Wells Fargo Chief Economist John Silvia.
But you can’t just blame the Fed for the emerging markets’ woes.
Silvia what’s happening with the four worst emerging market currencies in his latest Weekly Economic & Financial Commentary:
This foreign selling of emerging market assets has caused the currencies of many developing economies to depreciate vis-à-vis the U.S. dollar (top chart). Among large developing economies, the worst performing currencies over the past three months have been the Turkish lira, which has weakened about 10 per cent against the greenback, the Indonesian rupiah and the Brazilian real (both down about 15 per cent or so). The Indian rupee has plunged 20 per cent, and it nosedived to an all-time low against the dollar this week. What distinguishes these currencies from, say, the Taiwanese dollar, which is only a bit weaker versus the U.S. dollar relative to early May?
What these countries have in common is that they each run current account deficits at present . In some cases, the rise this week in oil prices, due to the escalation of the Syrian crisis, has added to the selling pressure on some emerging market currencies. India and Turkey import most of their crude oil needs, so higher oil prices automatically lead to wider current account deficits. Current account deficits need to be financed from capital inflows from abroad, but when foreign investors head for the exits the currencies depreciate. This depreciation makes exports less expensive to foreigners and imports more expensive to domestic residents. Over time, currency depreciation should cause current account deficits to narrow again.
So, eventually, this should work itself out. But in the near-term, it looks like the pain will continue.
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