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Tapering Could Slam These Two EM Currencies


The mere mention of Federal Reserve tapering can pressure various emerging markets currencies, but two could be especially vulnerable when the Fed finally does pare its bond-buying efforts.

The Indonesian rupiah, already this year’s worst-performing emerging markets currency, and the Brazilian real are J.P. Morgan’s picks among developing world currencies that are vulnerable to Fed tapering.

“The risk is [even] higher for expensive currencies. Both BRL and IDR are overvalued versus their 10 year average REER,” Barron’s reported, citing the bank.

That outlook comes after both currencies lost more than 4% last month. Since the start of November, the WisdomTree Brazilian Real Fund (BZF) has lost 4.2%. Slowing economic growth in Latin America’s largest economy coupled with waning commodities demand and alarmingly high import prices could contribute to further downside for the Brazilain real. [Brazil Flirts With Recession]

There is no individual ETF for the Indonesian rupiah, which has been stung by tapering talk and Indonesia’s own widening account deficits. Like Brazil, Indonesia, Southeast Asia’s largest economy, has not been shy about raising interest rates.

Unfortunately, interest rate hikes in both countries have proven largely ineffective in stemming currency weakness. Indonesia experienced a $8.4 billion current-account deficit, its second-highest shortfall on record in the third quarter, after seeing a record $9.9 billion difference in the second quarter. [Indonesian Central Bank Grows Desperate]

As for the once besieged Indian rupee, that currency has recently perked up and global banks do not appear as concerned about that currency as they are about the rupiah. The WisdomTree Indian Rupee Fund (ICN) is up 1.5% in the past month. [What's Wrong With the Rupee?]

The real and rupiah combine for 12.7% of the WisdomTree Emerging Currency Fund’s (CEW) weight, but that  has traded modestly higher in the past 90 days because of its ample exposure to account surplus currencies like the South Korean won.

WisdomTree Emerging Currency Fund

ETF Trends editorial team contributed to this post.

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.