Watch EM volatility if Fed pushes button

Policy clarity could reward currencies of nations with healthy current accounts but hobble rupee

Trying to second-guess the US Federal Reserve on “tapering” is fast becoming the only game in town. Zero hour is approaching soon: the Federal Open Market Committee begins its deliberations next Tuesday.

Intriguingly, the summer pummelling of credit and emerging markets gave way to a bear market rally in September.

Check out emerging market ETF performance since August 28 and you could be tempted to ask: “What taper tantrums?”

The iShares MSCI Emerging Markets ETF has jumped 11 per cent, while the SPDR S&P 500 ETF crept up just 3 per cent. ETFs covering Indian and Indonesian assets jumped nearly 20 per cent.

Indeed, bearishness over any Fed move has waned as the “tapering isn’t tightening” message has had an impact.

But how will beaten-down Asian currencies fare if the Fed does push the button?

Morgan Stanley says a knee jerk sell-off is possible, but policy clarity will reduce volatility and soon reward currencies of nations with healthy current accounts, such as the Malaysian ringgit, Philippine peso and Thai baht. It could also hobble the Indian rupee and Indonesian rupiah, however.

Crédit Agricole likes the peso and Korean won, arguing flows are rebounding and tapering has already been priced in.

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