FX Alpha 10 September 2013

Cause and effect

Recent price action in Emerging Market currencies represents a mere lull in what is likely to be a more prolonged and sustained period of EMFX weakness.

EM currencies were able to stop their downward trend of late, though they failed to pare the significant losses recorded since May. Friday’s US labour market report was neither fish nor fowl. However, looking at the volatilities of NFP and unemployment rate shows that the drop in the latter to 7.3 % might weigh more than the disap pointing NFP figures. So it should not surprise that most of the market participants still expect the Fed to start tapering in September. Against this backdrop the latest stabilization of EM currencies could be seen as a signal that this time the countries will not be hit as hard as in the 1997 Asian crisis. Or will the situation in the respective countries deteriorate further?

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