QE in emerging markets: Unconventional risks

QE is the equivalent of printing currency. Printing more currency increases its supply, and should therefore lower its price. The US and other core central banks have managed to execute QE without a material adverse effect on FX, partly as their underlying currencies are underpinned by a muscle memory of relative macro stability.

The USD is of importance here. It is the global reserve currency, and we find during times of crisis that there is excess demand for it. That’s a luxury position from which to execute QE. The likes of the EUR and the JPY tend to trade as a stationary series around the USD on their respective crosses – big swings, but typically mean-reverting. And since they are all at QE there isn’t much for them to depreciate against.

But emerging markets are different. Here FX rates are trending, typically reflecting wider inflation differentials, on top of the tendency for capital flight when policy wobbles, which in turn produces echoes and overshoots. Now throw in a dose of QE and you have a further excuse for vulnerability. The question is, to what extent are risks being run?

That's what we examine in this report.

Emerging market central banks that have kicked off QE are a real mixture of players. Many of the central banks are not telling us how much they are doing, or indeed intend to do. From Poland to Turkey, Brazil to South Korea, we examine who's doing what, whether it's working and whether it's worth it.