FX Viewpoint | Emerging market FX downside limited | Article – HSBC VisionGo
- Emerging market currencies sold off on a more hawkish Fed
- But we do not see a repeat of the 2013 ‘taper tantrum’…
- ...as stronger fundamentals will support these currencies
Emering market currencies have depereciated vs. USD since mid June
The USD has seen broad strength since the Federal Open Market Committee (FOMC) meeting in mid-June, where the Federal Reserve (Fed) turned more hawkish than the market had expected. Many emerging market (EM) currencies have also sold off during this time, and are behaving in a similar way to the ‘taper tantrum’ of 2013 when a hawkish Fed triggered a rapid depreication in EM currencies.
But we do not think this is a repeat of the 2013 ‘taper tantrum’
The question is, is this a repeat of the taper tantrum, and will EM currencies sharply weaken in the second half of this year? In short, we do not think so, and we outline four important differences between EM currencies now and in 2013:
EM fundamentals are stronger this time around
- EM current account balances are better than in 2013 as tepid demand has weighed on EM imports over the past year.
- Investor position in EM is less stretched than in the past, which points to these currencies being less susceptible to FX outflow pressure.
- Many EM currencies, especially commodity currencies, are now undervalued compared to 2013.
- Many EM central banks are now consideringlifting monetary policy rates, driven by inflationary pressures, rather than the depreciation pressues of 2013.
We do not see much further downside to EM currencies in the second half of this year
We believe these factors should provide support to EM FX and we do not see much further downside over the remainder of the year. But, while there is a risk that the USD turns out stronger than we expect, fundamentals of EM currencies are stronger this time around and should not add fuel to the fire.
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This report is dated as at 02 July 2021.
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