EM FX to avoid another taper tantrum like in 2013 – HSBC

Emerging market currencies sold off on a more hawkish Federal Reserve. Notwithstanding, economists at HSBC do not see a repeat of the 2013 ‘taper tantrum’ as stronger fundamentals will support these currencies.

Four important differences between EM currencies now and in 2013

“1. EM current account balances are better than in 2013 as tepid demand has weighed on EM imports over the past year.”

“2. Investor position in EM is less stretched than in the past, which points to these currencies being less susceptible to FX outflow pressure.”

“3. Many EM currencies, especially commodity currencies, are now undervalued compared to 2013.”

“4. Many EM central banks are now considering lifting monetary policy rates, driven by inflationary pressures, rather than the depreciation pressures of 2013.”

“We do not see much further downside over the remainder of the year. But, while there is a risk that the USD turns out stronger than we expect, fundamentals of EM currencies are stronger this time around and should not add fuel to the fire.”