Big Depreciations: What Happens Next
by John Mullin, May 2018

Recent emerging market currency declines can be seen in perspective by viewing the past twenty years of the MSCI EM Currency Index (see chart below), which tracks the returns to a portfolio of un-hedged emerging market money market investments. Two post-crisis developments stand out:

1. The index declined between May 2013 and January 2016, a period that began with Bernanke’s May 2013 statement signaling the Fed’s intention to taper its program of quantitative easing.

2. The index increased by roughly 20% between January 2016 and March 2018, a period marked by multiple Fed funds rate hikes.

What stands out here is that EM currencies performed poorly during a period when Fed rate hikes were anticipated, but strongly during the first two years of actual rate hikes.

Viewed from this perspective, it is somewhat puzzling to read commentaries that attribute recent EM currency declines to tight Fed policy. After all, the markets have been digesting anticipated and actual rate hikes for at least five years now. Of course, it is not an easy matter to identify the source of currency movements in a particular month or quarter. That being said, however, it would appear that increased global trade tensions are a more likely culprit behind recent EM currency weakness.

John can be reached at jmullin@dcmadvisors.com.