Market concern over rate expectations and Fed talks of a possible change to rate guidance have pressured emerging market currencies and related exchange traded fund, re-igniting fears of another so-called taper tantrum-induced fallout.
The WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW) dipped 0.5% Wednesday and declined 1.5% over the past five trading days. CEW tracks a basket of emerging currencies, including the Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, South African Rand, Polish Zloty, Russian Ruble, Turkish New Lira, Chinese Yuan, South Korean Won, Indonesian Rupiah, Indian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht.
Among the notable currencies on the decline, the Turkish lira depreciated to its weakest since March and the South African rand has dipped to its lowest since February, reports Chiara Albanese for the Wall Street Journal.
Fueling the weakness in emerging market currencies, the U.S. Federal Reserve its expected to reveal its latest monetary policy decision while many observers expect the central bank to end its bond-purchasing program in October and even push for a rate hike or contemplate changing the way it provides forward guidance on rate changes. The Federal Open Market Committee is expected to make an announcement next Wednesday. [EM Currency ETF Gets a Lift]
However, while investors expect the emerging markets to remain pressured, some don’t expect a same level of volatility experienced last year.
“Compared to the taper tantrum, where we had expensive valuations and vulnerable fundamentals, we are in a much better position,” Paul McNamara, an asset manager of emerging-market debt at GAM, said in the article. “We are watching and waiting for the point where things cheapen up and we want to buy more. We are looking for bargains.”
For instance, Turkey has hiked rates early this year to help support the lira currency.