Emerging Market Currencies Still Vulnerable

The dust is clearing from the US Federal Reserve's September 18 decision not to begin paring back its asset purchase programme. The way things are shaping up technically, there looks to be continued pain ahead for vulnerable emerging market (EM) currencies versus the dollar, and further upside for equities, in line with our view.

With the Fed taper in all likelihood pushed back until 2014 (probably March at this stage, pending all-important data in the next few months), some EMs that have been running large current account deficits have been granted a reprieve, and have shown signs of shoring up macroeconomic imbalances.

For example, India's merchandise trade deficit shrank to a 30-month low in September equivalent to 4.2% of GDP, in contrast to double-digit highs seen earlier in 2013. Others, like Turkey, have done little to stem imbalances, and remain vulnerable to another bout of Fed-led risk aversion.

Indications so far are that the US government shutdown in October has not dented business confidence or output significantly, and US bond yields remain above 2.5%, suggesting that higher interest rate risks are not going away. Broadly speaking, so long as these dynamics remain in play, we continue to see medium-term upside for the US dollar against EM FX.

Further analysis of a full range of EM currencies is available to subscribers on Business Monitor Online.

This Week's Trivia Question

Last week's question was inspired by the presidential election in Georgia on October 27, and the question was as follows: What rare object was kept in ancient Georgia and was the subject of a sea quest by a figure from ancient Greek mythology? (Hint: the hero of the quest later died when part of his ship broke off and fell on him.) The answer is, of course, the Golden Fleece, which was located in the ancient kingdom of Colchis, to which Jason and the Argonauts journeyed.

This week's questions have a Halloween theme and are as follows: Which national leader was quoted this week as saying that an image of his predecessor had appeared to workers on a wall of an underground railway construction site in the middle of the night? And which separate national leader, who was elected in 2012, had still not moved into his official residence (according to the last such media reports in August), amid rumours that it is haunted?