The Pain QE Tapering Can Cause: First Emerging Markets, Now Developed Economies

In my most recent post I discussed the effects the Fed’s QE tapering would have on emerging markets, specifically Russia. Tapering has really hurt EMs as yield-seeking investors moved their money from relatively high-risk investments in emerging markets to less volatile assets such as U.S. treasury bonds. It’s also worth noting that lots of the negative EM buzz has been fueled by doubts in the speed of the growth of the largest emerging market– China (more on that a bit later).

As it turns out, though, EMs aren’t the only ones hurting. The suffering has spread to developed nations as well. Many developed nations’ currencies have been hit hard:

Early in the day, the Canadian dollar hit a 4 1/2-year low of 1.1225 Canadian dollars to the U.S. currency, though it later recovered in late New York trading to C$1.1130. The euro slumped to $1.3479 intraday, its lowest since November, while the Norwegian krone traded above 6.3 to the dollar for the first time since 2010, and traded at 6.2793 per U.S. dollar late in New York. The greenback rose more than 1% against the New Zealand dollar to US$0.8086 and was up 0.5% against the Australian dollar at US $0.8756.”

It’s strange to see developed nations, especially countries like Norway and Australia, who have had stable, positive GDP growth (both hovering around 2-3%) in the past decade, experience such a hit. The reason lies in the fact that developed economies like Norway and Australia depend on commodities exports. With investors questioning China’s ability to keep growing at the double-digit rates it has in the past, investors fear that the demand “for Norway’s oil, Australia’s iron ore, and New Zealand’s dairy products” will be weakened.

The euro has seen better times as well, falling to its lowest rate against the dollar since November. And with the ECB planning to highten QE measures, U.S. bonds are looking more and more attractive even to proud European investors.

All this investor doubt is causing capital to flow into safe havens like the U.S. and Japan, but my prediction is that this flow is only a temporary happening. The buzz and speculation the Fed’s announcements create cause investors to become over-paranoid about the riskiness of their investments abroad. I think that after some of the media attention subsides, investors will start to realize that the dollar and other safe haven currencies are overvalued, causing capital to flow back out to emerging markets. It may not be in the amounts that were there originally, but at least some of the damage will be undone.

One thought on “The Pain QE Tapering Can Cause: First Emerging Markets, Now Developed Economies

  1. pranavrk

    QE tapering wasn’t much of a surprise to investors, but it may have just been enough of a trigger for them to consider changing their investments like you suggest. Whether they go back to these countries may depend a lot on how each emerging market restructures their respective problems. For instance investors in India, Turkey, and South Africa might be a little more cautious since it seems all three central banks are looking to tighten their respective money supplies.

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