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Tapering Bets Send EM Currencies Reeling


Emerging market exchange traded funds are experiencing a sharp decline as volatility surrounding the Fed tapering, political instability and growth concerns fuel the worst sell-off in developing country currencies.

The Turkish lira fell to a record low, South Africa’s rand depreciated to its weakest against the dollar since 2008 and Argentina’s peso plunged 12% Thursday, the largest dip in 12 years, Bloomberg reports. [King Dollar Makes These ETFs Look Like Paupers]

Emerging market currencies have been weakening since the Fed first hinted at tapering in May 2013 – tighter Fed policy would strengthen the U.S. dollar against a basket of foreign currencies.

The WisdomTree Emerging Currency Fund (CEW) dipped 0.5% Friday. The fund has declined 2.4% year-to-date and fell 7.6% over the past year. Looking at CEW’s country exposure, Turkey makes up 6.2% and South Africa is 6.4%. CEW also has exposure to other troubled currencies, such as the Indian rupiah 7.1% and Brazilian real 6.5%.

“The current environment is potentially very toxic for emerging markets,” Eamon Aghdasi, a strategist at Societe Generale SA, said in the article. “You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.”

Emerging market currencies began to weaken Thursday after a HSBC Holdings Plc and Markit Economics report that pointed to a potential contraction in Chinese manufacturing for the first time in six months. [IMF Concerns Could Mean More Woes for EM ETFs]

“The gradual erosion of sentiment for the EMs, owing to the perception that several EM economies or countries are ‘on the brink,’ simply made the run on reserves in Argentina and the poor China data the ‘straws that broke the camel’s back’,” Thierry Albert Wizman, a strategist at Macquarie Group Ltd., said in the article.

Meanwhile, the Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) both fell 1.8% Friday. EEM has declined 6.0% year-to-date while VWO is down 5.4% so far this year. [No One Likes Emerging Markets]

WisdomTree Emerging Currency Fund

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.