The mere mention of Federal Reserve tapering can pressure various emerging markets currencies, but two could be especially vulnerable when the Fed finally does pare its bond-buying efforts.
The Indonesian rupiah, already this year’s worst-performing emerging markets currency, and the Brazilian real are J.P. Morgan’s picks among developing world currencies that are vulnerable to Fed tapering.
“The risk is [even]higher for expensive currencies. Both BRL and IDR are overvalued versus their 10 year average REER,” Barron’s reported, citing the bank.
That outlook comes after both currencies lost more than 4% last month. Since the start of November, the WisdomTree Brazilian Real Fund (NYSEArca: BZF) has lost 4.2%. Slowing economic growth in Latin America’s largest economy coupled with waning commodities demand and alarmingly high import prices could contribute to further downside for the Brazilain real. [Brazil Flirts With Recession]
There is no individual ETF for the Indonesian rupiah, which has been stung by tapering talk and Indonesia’s own widening account deficits. Like Brazil, Indonesia, Southeast Asia’s largest economy, has not been shy about raising interest rates.
Unfortunately, interest rate hikes in both countries have proven largely ineffective in stemming currency weakness. Indonesia experienced a $8.4 billion current-account deficit, its second-highest shortfall on record in the third quarter, after seeing a record $9.9 billion difference in the second quarter. [Indonesian Central Bank Grows Desperate]