Between May and June, when the FED sent the first signals of wanting to reduce the intensity of bond purchases (the so-called "tapering") there was a great flight of capital from emerging countries.
The currencies of these countries have suffered greatly, undergoing a heavy depreciationor which particularly affected the Brazilian real, the Indian rupee and the Indonesian rupee. These coins have recorded double-digit negative variations.
The suspicion that can legitimately arise is that, after this abrupt drop, the currencies of Emerging Countries are cheap. One way to understand if this hypothesis is true is to analyze the dynamics of the average real exchange rate, more precisely the Barclays index of the currencies of emerging countries, adjusted for inflation. Currencies often deviate from fundamental evaluations such as the one we are about to carry out, however, by aggregating many countries and considering a long time horizon, some useful ideas can be obtained.
After a decade of economic growth, which has also caused an increase in prices and labor costs (consequently decreasing the competitiveness of these countries), Barclays Emerging Market Currencies Index fell 5% approximately from the all-time high (May 2013). However, as the chart below shows, in real terms the currencies of these markets remain around 12% more expensive than their historical average, even after the capital flight that took place between May and June.
In aggregate, therefore, the exchange rates of emerging currencies still seem to have room to depreciate.
Emerging Countries: room for further depreciation of exchange rates
