Why a poor US jobs report gives emerging markets reason to smile

Have to admit, it was an anti-climax. After the week’s excited build-up, the actual data was decidedly underwhelming: the US economy managed to add just  74,000 jobs in December, which represents, the smallest monthly job gains since the start of 2011. The expectations had ranged between 180,000 and 200,000.

That now throws into doubt other indicators that suggested the US economy is starting to recover strongly.

Still, the unemployment rate fell to 6.7% from 7% — the lowest level since 2008 – but the decline seems to have been triggered by more people dropping out of the work force, according to initial reports.

Disappointing as the data may be for the US, emerging markets will be heaving a huge sigh of relief.

Earlier this week, emerging markets from Brazil to Indonesia had started to show the first signs of nervousness about the US Federal Reserve’s ‘tapering’, or a winding down of, its huge bond-buying programme this month.

The tapering will see the Federal Reserve reduce its bond-buying programme by $10 billion to $75 billion from January.

The immediate cause of the jitters among emerging markets was the possibility that an improving US economy – underlined by improvements in the labour market – would justify further reductions in the central bank’s bond purchases.

The easy money policy, including ultra-low interest rates, in the US has, so far, led to foreign investors seeking out higher-yielding assets in emerging markets. If the US economy improves, foreign investors could be prompted to pull out their money from riskier emerging markets and park it in US assets.

That will lead to the dollar gaining strength against most other currencies (less dollars in the financial system as a result of tapering will lead to an increase in the value of the greenback.)

Indeed, that has been one of the biggest worries of central banks and governments in emerging markets because such an exit by foreign investors could lead to precipitous slumps in the value of emerging market currencies and other financial assets.

A Wall Street Journal report noted that the South Africa rand slumped to a new five-year low against the dollar earlier this week, leading the declines among emerging market currencies. Other notable currencies being rattled by the prospect of a Fed tapering include the Brazilian real and the Turkish lira.

In Asia also, the tremors are being felt by currencies across the region. According to a Bloomberg report, earlier this week, the South Korean won fell back to nearly 1062 against the US dollar, while the Singapore dollar weakened slightly to 1.27 against the greenback.

Indonesia’s rupiah also slipped to 12,193 against the dollar. In addition, the dollar gained muscle against the Japanese yen, hitting a five-year high of 105 yen.

The more vulnerable markets, such as India and Indonesia, which have/earlier had wide current account deficits, have been bulking up their foreign exchange reserves over the past few months as they prepare for any stampede for the exits by foreign investors.

A Reuters report notes that foreign exchange reserves in 13 Asian countries excluding Japan tracked are estimated to have risen 3.2 percent to a record high of $6 trillion in the October-December quarter, marking a near 12 percent increase for the whole year.

The rise in reserves has been led by India and Indonesia, the report added. Will the pumped up reserves help? Maybe, but it’s hard to say with any certainty right now.

The latest US jobs data does indicate, however, that the Federal Reserve is unlikely to step on the accelerator on tapering just yet. It remains to be seen whether the December report is just a blip or an indicator of a more subdued trend in jobs growth.

For now, emerging markets get some more wiggle room.

The world’s largest economy may finally be on the mend, but emerging markets are feeling grumpy about that.

[Image Credit]

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