This summer saw major sell-offs in emerging market currencies. Currencies such as the Mexican peso, Thai baht and Malaysian ringgit have all suffered corrections over the past few months.
But the US dollar has continued to climb against its peers. Notably, the Indian rupee felt the pressure when it fell to a record low of 64.55 to the dollar in late August, recording a drop of 4 per cent in one week alone. This came despite the Reserve Bank of India’s (RBI’s) efforts to stop the currency’s slide. The RBI announced new measures to buy long-dated bonds to counter a recent rise in yields.
In Mexico, the peso fell after disappointing second quarter GDP data, which showed Latin America’s second-largest economy had shrunk by 0.7 per cent compared with the first quarter of the year – the first contraction in almost four years. The dollar climbed 1.4 per cent to 13.16 pesos. Indonesia’s currency, the rupiah also fell in the same week, down
0.7 per cent to 10,755 rupiah – a five-year low. One year performance of the rupiah, peso and real against the dollar is shown in Charts 1-3.
According to JP Morgan’s Emerging Market Bond Index (EMBI) of dollar-denominated sovereign bonds issued by a selection of emerging market currencies, the countries collectively fell 6.1 per cent in the second quarter of 2013 – the biggest drop since 1998.
Bonds started selling off after the US Federal Reserve began to debate whether or not to pull back on its monetary stimulus, quantitative easing (QE). The first round of US QE began in 2009 after the Fed started buying $500bn in mortgage-backed securities (MBS) and $100bn of government-sponsored enterprises to encourage a stronger growth in the American economy after the financial crisis of 2008.
The second round began in November 2010 and the third round, named QE3, began in September last year after an 11 to 1 vote saw the Fed launch a $40bn-a-month programme of open-ended bond purchasing of MBS.
Since the start of the year, there have been numerous discussions of when the Fed will begin tapering which has led analysts to believe it may come sooner, rather than later. Talk of tapering has led to the sell-off we have seen in the emerging market currencies over the past few months and the dollar has been getting stronger.
But because of the difficulties in the emerging market currencies, fund managers have been flocking to buy emerging market debt.
