A large number of emerging markets currencies declined en masse during the period from 30 April 2013 through 31 January 2014, with many observers applying the moniker of contagion. Over the whole period many emerging market currencies were clustered in the range of losing between 9% and 22% of their value against the US dollar, with a few remaining stable, and some losing much more.
Our research argues that the emerging market contagion was driven by asset allocation shifts. That is, expectations for relative risk-adjusted returns went dramatically against the emerging markets, and the Fed’s QE tapering had nothing to do with the FX activity.
Starting with risks in the political arena from the spring of 2013 onward, developments went against emerging market. The Syrian Civil War was complicated by the nerve gas attacks and related US-Russian diplomacy. There were demonstrations in the plazas of Turkey over development plans as well as a scandal reaching high into the Government. Middle class residents were taking to the streets of Brazil to demand improved government services, even as the Government was spending generously on the infrastructure for the upcoming World Cup in 2014 and Olympic Games in 2016. In Thailand, political unrest was threatening the electoral process. India’s election campaign was heating up, with the possibility of a major change in political power. Argentina experienced significant inflation, a currency devaluation and overall political confusion. Ukrainian political tensions became violent. Some of these tensions eased while others gained momentum over the year, but they all combined to create the impression that the riskiness in many emerging market countries was rising, and that spillover effects in various regions were not only possible, but likely.