Aug 20, 2013

tapering and currency depreciation

It seems that the currency of many countries in asia like india rupee has depreciated because of Fed's tapering statement recently, can someone explain why is that? Thanks!

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20 Comments

AM

10y

asian currencies such as the INR are considered risk currencies as the fed tapers, risk assets will see an overall sell-off (equities, commodities, EM currencies, etc)

ER

10y

can you explain what do you mean by risk currencies?

?

10y

hzsh2009:

Thanks! but I still have two small questions, one is that why other countries rates go up-> weakens foreign economy, and two, since the rates in US also goes up, wouldn't that lead to the deprecation of dollar, which offset the result of depreciation of foreign currencies like rupee? Please inform.

1) Price of imports goes up or if debt is denominated in foreign currency, but this can be offset with exports, so it depends 2) Interest rate parity doesn't hold short-term, and probably not in the long run either.

hzsh2009:

can you explain what do you mean by risk currencies?

Inflation, pressure on peg, highly volatile (questionable?), unsustainable debt level, political risks.

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?

10y

Bump

O

10y

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

ER

10y

Thanks! but I still have two small questions, one is that why other countries rates go up-> weakens foreign economy, and two, since the rates in US also goes up, wouldn't that lead to the deprecation of dollar, which offset the result of depreciation of foreign currencies like rupee? Please inform.

Definition of Trader

?

9y

.

O

10y

alpo:

FrankD'anconia:

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

laughing out loud...higher interest rates attract capital big dog. You have a disconnect and minimal understanding between FDI, FX swaps and carry trades

Ya got me boss, too bad I didn't make the clarifying statement that I could be wrong.... just kidding, I did. Fwiw though, I dont see why your theory would hold if the other country's rates rose as well.

HF

10y

Best Response

alpo:

FrankD'anconia:

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

laughing out loud...higher interest rates attract capital big dog. You have a disconnect and minimal understanding between FDI, FX swaps and carry trades

U really shouldnt be laughing "big dog" because while higher rates do generally draw in capital, many emerging markets including India are also supported by equity flows which flee higher rates. This is one of the reasons EM rate hikes don't always work to protect currencies...indeed India hiked on day 1 of this crisis and USDINR ended the day up 2%ish. So no need to insult this guy when a) he said he wasnt sure and b) you werent even right in your response.

And no one has the "correct" answer for why taper-talk caused such an EM meltdown...there are many reasons why it has gotten so ugly and there is no one right reason.

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AM

10y

if US rates go up, the yield on foreign investments is less attractive compared to safer ones (so currency depreciates). places like india have shitty options... raise interest rates to protect currency? hurt economy. dont do that? rupee goes to shit

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HF

10y

cauchymonkey:

if US rates go up, the yield on foreign investments is less attractive compared to safer ones (so currency depreciates). places like india have shitty options... raise interest rates to protect currency? hurt economy. dont do that? rupee goes to shit

+1

Carry becoming less attractive is a signal which creates an incentive for the mkt participants to get out of EM. For some places where positions are large and idiosyncratic issues are present (e.g. INR, IDR, BRL), this ends up resembling shouting "Fire!" in a crowded theatre.

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ER

10y

Thanks!

ER

10y

Thank you!

Mont

?

10y

It's actually a mixture of reasons:

Excess liquidity that has been a result of QE has been pumped into higher yielding assets (EM). Once that Liquidity detox starts to take place, there is a natural pull back of risk assets, EM suffers, and the ccy depreciates
Normalising of USD rates will cause the reversal of EM money to the the US.

?

10y

Bondarb:

alpo:

FrankD'anconia:

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

laughing out loud...higher interest rates attract capital big dog. You have a disconnect and minimal understanding between FDI, FX swaps and

U really shouldnt be laughing "big dog" because while higher rates do generally draw in capital, many emerging markets including India are also supported by equity flows which flee higher rates. This is one of the reasons EM rate hikes don't always work to protect currencies...indeed India hiked on day 1 of this crisis and USDINR ended the day up 2%ish. So no need to insult this guy when a) he said he wasnt sure and b) you werent even right in your response.

And no one has the "correct" answer for why taper-talk caused such an EM meltdown...there are many reasons why it has gotten so ugly and there is no one right reason.

I don't have to energy to argue this right now. Interest rates strictly carry more clout than equity flows (see A History of Interest Rates, Homer/Sylla). I appreciate you trying to be a hero, though. In any event, I do agree there are many reasons as to why there is a meltdown in EM.

HF

10y

alpo:

Bondarb:

alpo:

FrankD'anconia:

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

laughing out loud...higher interest rates attract capital big dog. You have a disconnect and minimal understanding between FDI, FX swaps and

U really shouldnt be laughing "big dog" because while higher rates do generally draw in capital, many emerging markets including India are also supported by equity flows which flee higher rates. This is one of the reasons EM rate hikes don't always work to protect currencies...indeed India hiked on day 1 of this crisis and USDINR ended the day up 2%ish. So no need to insult this guy when a) he said he wasnt sure and b) you werent even right in your response.

And no one has the "correct" answer for why taper-talk caused such an EM meltdown...there are many reasons why it has gotten so ugly and there is no one right reason.

I don't have to energy to argue this right now. Interest rates strictly carry more clout than equity flows (see A History of Interest Rates, Homer/Sylla). I appreciate you trying to be a hero, though. In any event, I do agree there are many reasons as to why there is a meltdown in EM.

u r using a DM framework to analyze EM markets...wjhen vol picks up EM currencies always follow the equity flow not the rate differentials. I am not "trying to be a hero" i just have actual experience trading EM markets unlike you.

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?

10y

Bondarb:

alpo:

Bondarb:

alpo:

FrankD'anconia:

U.S. is the best credit risk available (questionable but just go with it) thus pays the lowest interest rate-> tapering causes rate to go up-> other countries rates go up as a result-> weakens foreign economy-> less appealing foreign investments-> foreign investments are sold-> foreign currency is converted out of -> foreign currency depreciates...but I could be wrong

laughing out loud...higher interest rates attract capital big dog. You have a disconnect and minimal understanding between FDI, FX swaps and

U really shouldnt be laughing "big dog" because while higher rates do generally draw in capital, many emerging markets including India are also supported by equity flows which flee higher rates. This is one of the reasons EM rate hikes don't always work to protect currencies...indeed India hiked on day 1 of this crisis and USDINR ended the day up 2%ish. So no need to insult this guy when a) he said he wasnt sure and b) you werent even right in your response.

And no one has the "correct" answer for why taper-talk caused such an EM meltdown...there are many reasons why it has gotten so ugly and there is no one right reason.

I don't have to energy to argue this right now. Interest rates strictly carry more clout than equity flows (see A History of Interest Rates, Homer/Sylla). I appreciate you trying to be a hero, though. In any event, I do agree there are many reasons as to why there is a meltdown in EM.

u r using a DM framework to analyze EM markets...wjhen vol picks up EM currencies always follow the equity flow not the rate differentials. I am not "trying to be a hero" i just have actual experience trading EM markets unlike you.

Yep. EM's trade categorically differently than DM markets...it would make sense that they follow equity flows rather than bond flows, since both are considered "risk assets" by most influential pools of capital today.

Emerging Market Economy UK

ST

10y

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