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18 Sep 2013
Emerging market FX risks on Fed taper, illiquid IDR highly exposed
FXstreet.com (Barcelona) - Heading into today’s FOMC finale, and the announcement of any Fed tapering of is asset purchase programme, there are number of EM currencies at risk, particularly those that have enjoyed strong inflows on cheap credit-driven liquidity from the Fed.
Indonesia and Malaysia could be particularly at risk – both have significant balance of payment imbalances leaving them highly exposed to changes in liquidity conditions. Malaysia has reported almost 5 percent of capital inflows coming from foreign fixed-income investors, and expect heavy selling of MYR non-deliverable forwards on any tightening. Similarly, the IDR is exposed, despite repeated aggressive money tightening measures. IDR has already seen heavy selling in the European session, breaking to IDR11,435 against the dollar.
Should the Fed do more than taper, such as reducing its unemployment threshold from 6.5 percent, we will see a wholesale sell-off in the South-East Asian markets. Look to the aforementioned USDIDR for big losses. However, given the timing of the scheduled Fed meeting with regards to the Asian FX markets, should trading liquidity conditions deteriorate, the SGD could be seen as a viable and liquidity proxy for INR and MYR pairs.
It is important not to rule out the possibility that the Fed will leave conditions unchanged. Given that recent declines in South East Asian currencies against the dollar have been on fears of declining Fed liquidity, maintaining current loose monetary conditions will rally the markets, particularly in those currencies with the greatest liquidity fears.
Indonesia and Malaysia could be particularly at risk – both have significant balance of payment imbalances leaving them highly exposed to changes in liquidity conditions. Malaysia has reported almost 5 percent of capital inflows coming from foreign fixed-income investors, and expect heavy selling of MYR non-deliverable forwards on any tightening. Similarly, the IDR is exposed, despite repeated aggressive money tightening measures. IDR has already seen heavy selling in the European session, breaking to IDR11,435 against the dollar.
Should the Fed do more than taper, such as reducing its unemployment threshold from 6.5 percent, we will see a wholesale sell-off in the South-East Asian markets. Look to the aforementioned USDIDR for big losses. However, given the timing of the scheduled Fed meeting with regards to the Asian FX markets, should trading liquidity conditions deteriorate, the SGD could be seen as a viable and liquidity proxy for INR and MYR pairs.
It is important not to rule out the possibility that the Fed will leave conditions unchanged. Given that recent declines in South East Asian currencies against the dollar have been on fears of declining Fed liquidity, maintaining current loose monetary conditions will rally the markets, particularly in those currencies with the greatest liquidity fears.