Taper Tantrums or the Start of an Emerging Markets Forex Crisis?

MahiFX Markets View:  Unwinding the US Federal Reserve's quantitative easing programme was never going to be easy and it has barely started and some emerging market countries are already running into trouble.

So far the worst hit countries also appear to be victims of their own internal problems, such as high current account deficits and political turbulence. In effect, ultra cheap money from the Fed was papering over some serious cracks – similar to what the EUR was doing for years for peripheral Eurozone countries.

It would seem perfectly natural for emerging market currencies to fall against USD as winding down quantitative easing is a form of monetary tightening. But will it reveal deep rot within some of those countries? For some yes. And in this age of global inter-connectivity that potentially matters a lot.

Trying to stop USD/TRY slide by hiking interest rates

Global growth & China are key

The two big external factors as to whether recent emerging market currency volatility is just a wobble or the beginning of a bigger crisis – is world economic growth and China.

If the main stimulus for the global economy shifts from ultra easy money policies towards real growth – then the currencies of the better managed emerging market countries should bounce back. The others will have to go through a painful readjustment process, but will be able to do so in a less hostile global economic environment.

China is also key. In part because it is seen as a proxy of developed country growth (because they buy its exports) and also because it's a huge economy in its own right and a major consumer of raw materials. So far it has only suffered an economic slowdown.

But one thing that is for certain – the Fed's transition towards a normalised monetary policy will continue to create volatility. The job of central bankers will be to ensure that this volatility doesn't feed on itself and turn into a systemic threat, such as an emerging market crisis.

So far the odds are on containment – mainly because the world economy is recovering. But that could change at any moment.

By Justin Pugsley, Markets Analyst MahiFX 

Follow MahiFX on twitter at: https://twitter.com/MahiFX

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Forex Economics Federal Reserve Markets

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GM takes lesson from Toyota's recall nightmare

In dealing with its ignition-switch recall, General Motors appears to have learned a thing or two from rival Toyota, which endured a slow-motion nightmare of revelations that blossomed around a series of recalls involving unintended acceleration claims four years ago.

GM has, so far, acted quickly in trying to take the fall for faulty ignition switches that are being blamed for accidents that claimed the lives of 13 people. After an initial recall Feb. 13, it more than doubled the number of vehicles involved to 1.37 million with a new recall Monday.

It also apologized, a move by GM that Clarence Ditlow, executive director of the Center for Auto Safety, says hasn't happened for decades.

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By contrast, Toyota let its debacle drag on and on, capped by congressional hearings.

It first came to public attention in August, 2009, when an off-duty California Highway Patrol officer was involved in the crash of a Lexus ES near San Diego that killed him and three passengers. One of the passengers phoned before the crash to report that the car could not be stopped.

A month later, Toyota launched its first recall of more than four million vehicles, blaming floor mats that could be become trapped under gas pedals and jam them wide open. Toyota, too, apologized to the family and customers affected.

But that was far from the end. After repeatedly pinning the problem on stacked floor mats, Toyota said it found a defect that could cause accelerator pedals to stick. It recalled millions of vehicles in January, 2010, and followed up a week later by stopping sale of many of its most popular models until they could be fixed.

As if things couldn't be bad enough, the secretary of Transportation at the time, Ray LaHood, called Toyota "a little safety deaf" before a congressional panel and another floor mat recall ensued, including even more vehicles. Toyota paid two se! parate $16.4-million fines for dragging its feet on recalls.

There are similarities between GM and Toyota's recalls. Both involved loss of life. Both involved expanded, or in the case of Toyota, multiple expanded recalls. But so far GM appears to have acted more decisively. Ditlow, for instance, credits GM's recall actions over the past two weeks, but faults GM for issuing a service bulletin, instead of a recall, in 2006 when it identified the problems in the Cobalt and knew how to fix them.

Of course, recalls of these sorts are often followed by litigation or federal safety regulators involvement. Toyota is still going through court cases involving unintended acceleration, although it has been cleared by federal safety regulators. It's yet to be seen how GM fares when it comes to the end game.