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Real Time Insight


SInce May 2013, emerging market (EM) stocks and currencies have been getting killed.

The reason?

The Fed in the United States signaled it was going to start to taper $75B in monthly bond-buying stimulus.  An almost palpaple sucking sound could be heard around the globe.  Capital rushed out of the emerging markets bound for safer places in advanced countries.  

A lot of countries were forced to raise their sovereign bond interest rates to offer more attractive fixed income rates and bring the money back.  Still other countries intervened directly in their currency markets and bought their currencies to keep their exchange rates stable.   By early winter 2013, it looked like these EM capital flight matters had been addressed, and EM currency stabilization was here.  

Then, the Argentine Peso did a massive face plant two weeks ago.

For an example, consider the Brazilian real.  The Brazilian real started 2013 at 2.00 to the U.S. dollar.  In early May, the announcement of the possibility of a Fed taper hit.  By August, the Brazilian real was pricing at 2.45 to the U.S. Dollar.  That's a -22% depreciation.  Then, the Brazilian real settled back down for a few months. The Brazilian real got to 2.25 to the U.S. dollar by late November. FYI, the Brazilian central bank did heavily intervene along the way to stabilize this currency.

Since the start of 2014, it has been ugly again for the Brazilian real.  It is now just off a fresh 2.44 high and is pricing at 2.39 to the U.S. dollar this morning.  The same story is true for the Turkish lira, Indonesian rupiah, South African rand, and Russian ruble.

It looked to me that the sudden crash in the Argentine peso a couple weeks ago took all of the EM currencies down again.  This time around, it started a crescendo of stock selling that reached into the U.S. equity markets.  The NASDAQ, S&P 500, and Dow all experienced heavy selling when the latest round of EM currency fear hit.

My RTI question:  Where Do EM Currencies Go From Here?

Some Choices -

(1) Bearish.  Capital flight is going to get worse.  EM currencies will hit new highs.

(2) Bullish.  It is over.  Super attractive valuations on EM stocks and attractive yields on EM bonds will bring the money back.

(3) Range-bound.  It is stable...for now.  EM stocks, bonds, and currencies are going to be avoided.  But with the help of their governments, their prices will be stable for now.

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