Market View: EM Woes to continue?

As conflicting data comes out of the Eurozone and the US investors are increasingly looking to EM to see if the latest set of data means a slowing down of the collapse of the emerging market bloc.Some have USDINR3been hit harder than others as INR s devaluation shows since May .Since tapering talk began in May the INR has weakened nearly 20% since May and a combination of caution towards EM and Indias perennial structural problems means INR faces aggressive selling momentum towards year end.Most analysts have revised their year end forecasts with HSBC being the latest as it revised it from 61 to 65 by year end.The INR weakness is certainly not unique as IDR,BRL,TRY/ZAR are all at their respective lows since 2008 and have been just as nervous and volatile however currencies such as MYR,THB and PHP have fared better meaning domestic factors have played an important part in the rupees demise to date.

A combination of current account deficits ,rising external debt and perceived lack of stimulus domestically have seen markets asking if the Reserve Bank can stem the flow or face a serious challenge to its capital account.The tapering talk from Fed will not dissipate and geopolitical factors such as the Syrian crisis will continue to weigh on investors USDINRnerves.Demand for Indian debt issued by RBI will be tepid at most so this weakness looks to stay for the short term providing a silver lining for Indian diaspora overseas as foreign remittances go a lot further than they did .If the weakness develops into a full fledged currency crisis with the current account deficit turning into a chasm then contagion to the rest of the current account bandits (IDR/BRL,MYR) cannot be ruled out …..Talk of another asian crisis may be premature at this stage but a wary eye should be kept on this region for now towards year end.

About Hetal Patel - Chief Editor, Europe

Hetal Patel has written 58 post in this blog.

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