Emerging-Market Currency Rout Will Worsen Next Year, Jen Says

Emerging-market currencies will probably see bigger declines next year when the Federal Reserve actually starts tapering its record stimulus, Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP said.

The Fed’s signal on May 22 that it may start reducing its $85 billion of monthly bond purchases caused the JPMorgan Emerging Markets Currency Index to drop 7.2 percent through the end of August. India’s rupee led the declines with a 16 percent loss during the period, followed by Brazil’s real at 14 percent and Indonesia’s rupiah at 13 percent. The gauge has since rallied 4.3 percent as the Fed unexpectedly decided to maintain its debt buying on Sept. 18.

“Emerging-market currencies will have serious moments” in 2014, Jen, the former global head of foreign-exchange at Morgan Stanley who predicted the rout in April, said at a conference in Singapore. “What we have seen this year I think is just a pre-earthquake tremor. It was only the possibility that the Fed will start tapering that caused this volatility.”

Currency markets in developing economies may see a “period of tranquility” in the next two months before facing another bout of weakness as the U.S. economy recovers, he said in a separate interview. The Fed will probably start trimming its monetary stimulus early next year and currencies of nations such as India and Indonesia that have large current-account deficits will be vulnerable to sell-offs, according to Jen.

India’s shortfall in the broadest measure of trade was 4.9 percent of gross domestic product in the April-June quarter, while Indonesia’s gap was 4.4 percent in the same period.

‘Deep Rooted’

Indonesia has increased prices of subsidized fuel since June and raised borrowing costs to cool domestic demand and tackle the current-account shortfall. India has curbed gold imports and restricted currency derivatives, as well as opened a window for banks to swap new foreign-currency deposits by non-resident Indians to boost dollar supply.

Structural problems in some developing nations are “deep-rooted,” said Jen. “They need to reform as well, but if these countries haven’t reformed in the past four years why are they going to do that in the next four months? Usually politicians are forced to reform when there’s a crisis because the electorate understand the need for reforms.”

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