Here we go again: Dollar up, emerging markets down on Fed taper anticipation

11/12/2013 8:12 pm EST


Jim Jubak

Founder and Editor,

Remember when developing economy currencies and emerging market stocks fell as bets that the Federal Reserve would begin to taper off its $85 billion in purchases of Treasuries and mortgage-backed assets sooner rather than later caused the U.S. dollar to climb?

In August when everyone was convinced that the Fed would begin The Taper at its September meeting, emerging market currencies and assets slumped. For example, on August 21 the iShares MSCI Brazil ETF (EWZ) hit a low of $41.26, finishing off a 24.9% slide that had begun on May 20.

We’ll we’re seeing a replay now. Emerging market shares have tumbled for nine days in a row, the longest slide since 2006. The iShares MSCI Emerging Markets Index ETF (EEM) has declined to its lowest level in two months.

Developing economy currencies have moved lower too. The Indian rupee has fallen to an eight-week low. On November 12 the South African Rand hit its lowest level in two-and-a-half months.

The driver for this decline is a belief that the odds have improved that the Fed might begin The Taper at the December 18 meeting of the Federal Open Market Committee. The majority opinion among economists, according to a Bloomberg survey, still points to an initial move at the committee’s March 19 meeting, but the odds on a December or January taper have improved recently. At the end of October, Citigroup, for example, raised the odds on a December taper to 20% from 10% and on a January taper to 45% from 25%. I don’t think the rest of Wall Street has moved that strongly toward a December or January taper, but the Citigroup change gives you a good idea of the trend.

It’s not so much that the consensus has changed radically as that traders see more of a need to hedge positions in case the consensus is wrong.

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