Policymakers step-up rhetoric while EM currencies fall

Talk of “currency wars” remains rife among EM policymakers but most EM currencies have actually weakened over the past month. This partly reflects growing investor fears of official intervention, but global risk appetite has also dipped – the rally in EM stocks has fizzled out too. Looking ahead, hints from the Fed that it may call an end to QE3 sooner than had been anticipated may calm EM concerns. But we still think that grappling with large and potentially destabilising capital inflows will remain a key issue for EMs over the next couple of years. Policymakers in Latin America are likely to be most active in resisting renewed currency appreciation given the strength of real exchange rates in the region. But currency strength is also a concern for policymakers in export-driven parts of Asia.