Emerging market currencies could crash

Wednesday,   06-Jul-2022   03:31 PM (IST)

Emerging market currencies which have dived in value triggering widespread interventions to curb their decline could crash. They are extremely vulnerable because they were elevated by stimulus during the COVID-19 pandemic. The weak foundations of those rises have been exposed by the withdrawal of the stimulus that fuelled them. This is being exacerbated by the resistance of many emerging market central banks to match or beat the Fed's tightening cycle. This is a major change from the norm which used to see these central banks rushing to match the Fed or to preempt it. The results are abundantly clear with emerging market currencies falling heavily and those of nations that rely on energy imports coming under greater pressure. The biggest risk is their illiquid nature. No emerging market currency can match the depth of market afforded to major currencies and these have started to move much more than usual with option vols rising to double digits. The movement for major currencies has clearly surprised many traders. The potential movement of less liquid emerging market currencies could shock them and with the Fed about to hike again, pressure on them will soon grow.