The chart below illustrates the performance of both various emerging market currencies and major currencies relative to the USD since the Fed announced its taper. Major pairs are blue-ish lines; emerging markets are purple-ish lines; US financial assets (stocks and bonds) are green-ish; China's Renminbi is in red.
Some observations:
1. The majors have been choppy.
2. Since Turkey raised rates, a move that was followed by rate hikes in South Africa and Russia, USD has fallen across the board.
3. US stocks have declined and bonds have rallied since Turkey's rate hike.
3. Through it all, yuan has strengthened slightly.
Where do we go from here?
Here are some of my thoughts:
1. I was skeptical the Fed would ever taper, and still am a bit, especially as we transition to the Yellen era. The first Fed meeting with Yellen as head will be March 18-19. Whether the taper continues then will be a big event.
2. If the taper does continue, I think emerging markets may continue raising rates in response. I think this will succeed in keeping capital in the country.
3. If it doesn't, I think emerging markets will be slower to send rates back down, and that capital from the US will pour back in, sending EM equities higher.
4. I think the Renminbi will continue appreciating regardless of the Fed's decision here.
The onset of Spring will be a key time to watch, in my opinion.
I'll trade it technically, but the situation looks bearish for USD from my perspective. There is the argument that tapering results in an outflow of capital from EM economies to the US, but recent price action suggests rate hikes can thwart this. I think capital controls are a tool EM economies can also use if necessary.