The Federal Reserve has announced that QE3 will last for at least another month, but that hasn’t stopped arguments about the future of emerging markets from raging. Not many analysts have had the time to issue reports in the wake of the Federal Reserve announcement, but there are some reports from before the announcement that shed light on EM policy for the medium term.
Many analysts are looking at emerging markets and seeing nothing but problems. Some see the Emerging Market Crisis as the ultimate progression of a problem that began at Bear Stearns and Lehman Brothers some years ago, while others see it as a simple change in the attractiveness of assets. Capital can once again be invested in America with confidence.
One analyst, Dev Ashsish of Societe Generale, takes a look at Latin America in a new report. He suggests that Latin American currencies are pushed by more external evens than they are by local fundamentals.
Black Swan first seen in 2008
Ashish awwa the 2008 financial crisis as the first Black Swan event of the current cycle. His analysis finds that the 2008 financial crisis had a much more realized impact on the currencies of Latin American countries than what was going on in those countries. In the period after the crisis, Federal Reserve policy was a powerful force in shaping money markets in Latin America.
Country fundamentals are important drivers of currency value over the long term, if external factors do not change. In the case of Latin America, external essentially run the show over the short and medium term, making it difficult to rely on a long-term based on fundamentals, according to the report.
The current depreciation being seen in Latin America money markets is most likely not based on country-specific problems. It is probably based on a single external Black Swan event driving the change.
What Black Swan?
2013 is seeing significant depreciation in the value of Latin American countries’ currencies. That, to Ahshish, means that 2013 could be shaping up to be another Black Swan year. That means the continent could trade almost unrelated to fundamentals.
Ashish was looking at Fed Tapering as the black swan driving Latin American currency in the current period, and he picked winners and losers on the continent based on that prediction. Tapering didn’t happen today and taper talk will continue as a black swan driving Latin American money markets.