In a new report called "The Myth of the great EM currency slump," Societe Generale's Klaus Baader writes that the reaction of different currencies has actually been diverse.
"A review of 12 Asia-Pacific currencies reveals that performances over the past two years have been highly diverse and contrary to the notion of a generalized sell-off across emerging markets," writes Baader, looking at Asian currencies.
A two-year timeframe shows what happened with these currencies even before the taper talk began in May 2013. Baader refers to three distinct groups within Asian EM currencies.
1. 'The Good' - These currencies appreciated "by a substantial amount" despite the concerns about the Fed taper: the Chinese yuan which appreciated 10% and the South Korean won which appreciated 12% are two examples. "In our view, one key fundamental reason why both currencies have traded so firmly lies in the fact that both economies generate large current account surpluses."
2. 'The indifferent' - These are currencies which didn't see a move of more than 5% on either side in the two years prior to May 2008: the Taiwan dollar, the Hong Kong dollar, the Singapore dollar, the Malaysian ringgit, Thai baht, and Philippine peso. "At least two of these experienced declines starting in Spring 2012: the Philippine peso and the Malaysian ringgit, which reversed their appreciation from the start of 2012."
3. 'The Ugly' - These are currencies that have fallen more than 10% since January 2012: the Indian rupee, the Indonesian rupiah, and two developed-market Asian currencies, the Australian dollar and the Japanese yen. Baader calls these the "gruesome foursome."
To get a clearer picture, however, Baader turns to a longer-term view going back to January 2008 before the financial crisis kicked off. Looking at short- and medium-term shifts in nominal exchange rates, Baader found a few key things:
"Firstly is that changes over the past two years in several cases merely reversed – to a greater or lesser extent – shifts in the opposite direction during the previous four years. This applies to the Australian dollar, the Japanese yen, the Korean won and the Philippine peso (the latter two remaining far weaker than they were in 2008), as well as the Thai baht. Also noteworthy is the medium-term stability of the Malaysian ringgit and the Hong Kong dollar – though the latter is of course pegged to the US dollar. Lastly, what stands out is the persistent and severe weakness of the Indian rupee and the Indonesian rupiah."
But inflation also weighs on exchange rates, so in the longer-term, Baader looks at real effective exchange rates (REER). Looking at it this way, for most currencies the difference between the nominal and real exchange rate is "fairly small." The two that stand out are "India and Indonesia, with gaps of 21pp and 18pp, respectively."
The nominal exchange rate refers to the price of currency X in terms of currency Y. For instance it would take more than 60 rupees to buy $1. The REER, however, adjusts for inflation.