“In considering whether a recalibration of the pace of its asset purchases is warranted,” Fed Chairman Ben Bernanke offered back on May 22, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.”
The reaction to this modest and heavily hedged statement in emerging-market currency and bond markets was swift and brutal. But the pain was not shared equally. As the top figure in today’s Geo-Graphic shows, those countries whacked hardest by taper-talk were those with large current-account deficits—Turkey, India, Indonesia, and Brazil. These nations had been cruising on the QE3, comfortably financing excesses of consumption over production with dollars desperately scouring the globe for return. But the mere hint of a QE3 docking was enough to send foreign investors into paroxysms of fear over depreciation and default risk. Not surprisingly, as the bottom figure shows, their currencies were also the biggest beneficiaries of last month’s taper-interruptus—the Fed’s decision to back away from a strongly hinted-at September pullback in asset buying.
The message received in emerging markets was clearly not one the U.S. Treasury had wished to send—in good times, apply a firm hand to keep your imports and currency down, and exports and reserves up. The U.S. Congress may cry “manipulation!”, but history shows that this is a small price to pay for taperitis protection.
Note: No data on Brazilian 10-year government bond prices are available from Bloomberg after July 2, 2013.
Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”