Global investors are asking the $85 billion question: When will the US Federal Reserve finally begin tapering its asset purchases?

With current Fed Chairman Ben Bernanke scheduled to leave office in January, his expected successor Janet Yellen appears before the Senate banking committee today for her confirmation hearing. Her prepared statement for the committee was released yesterday, sending both gold and US Treasuries higher because her remarks were clearly more dovish than the market had expected.

But government data showed that US employers added more jobs than expected in October, leading many to speculate that the Fed just might begin tapering before the end of the year.

Regardless of the exact timing, it’s a generally accepted fact that we’re getting closer to the end of quantitative easing. That’s creating a dichotomy in the currency markets, as participants are once again beginning to focus on fundamentals rather than simply betting the Fed will continue funding debtor markets with easy money.

The International Monetary Fund forecasts that emerging market exports will only grow by about 3.5 percent for the full year, the worst performance in nearly four years, while at the same time emerging nations are saddled with growing deficits. Consequently, many currencies have suffered high single-digit declines so far this year.

The Indian rupee is off by nearly 20 percent year to date, as the country struggles against slowing growth and a current account deficit of nearly 5 percent. The Indonesian rupiah has showed a similar decline of 15 percent, as the country runs a deficit of more than 3 percent and strict export bans on raw materials come into effect next year that are sure to dent growth. Other currencies such as the Turkish lire, Brazilian real and the South African rand are under similar pressure.

Growing deficits, slowing growth and inflation worries are all serving to impede inflows into weaker countries and currencies, leading to marked depreciation. Over the long term, if weaker countries are able to get a handle on their structural issues, currency depreciation won’t be the end of the world. In fact, in time weaker currencies drive export growth and ultimately attract foreign investment again.

But that process will likely take a year or more to play out and won’t begin in earnest until we have greater visibility on just what the Fed plans to do and when.

Tapering probably won’t materialize until sometime in the first quarter. With only about two months left in his term as chairman, Bernanke would be hesitant to wind down quantitative easing as he gets ready to leave.

Bernanke castigated Congress for fiddling on the budget and allowing a shutdown that weighed on US economic growth. He’s also staked his reputation on stimulating the economy back into growth. Yellen is someone Bernanke has worked closely with for years and who is clearly dovish on inflation. She has publicly said she would maintain a loose policy, so Bernanke isn’t likely to undercut her position by tapering before her term begins. At this point, any decision on curtailing easing will have to be taken by Yellen.

Since currency fluctuations play such an important role in generating returns for global investors, for now that means countries which are experiencing significant deprecation should be avoided. But that doesn’t mean that there’s a dearth of opportunities.

The euro has performed surprisingly well against the US dollar. The region isn’t exactly getting a handle on the underlying causes of its economic problems, but it’s working through the symptoms. The euro has appreciated by nearly 6.2 percent vis-à-vis the dollar over the trailing year and is likely to continue moving higher as the region’s economy stabilizes.

And while the Mexican peso has depreciated against the dollar over the last six months, over the trailing year it hasn’t lost any ground. As the country continues to grow and the government takes definitive steps to liberalize its economy, the peso should maintain its sold performance despite persistent drug-related violence in the border regions.

The Israeli shekel has performed quite well over the past year, despite the ongoing turmoil in the region. Over the past 12 months, the shekel has appreciated 11.4 percent relative to the dollar, though appreciation has slowed following a rate cut by the country’s central bank last month.

The country has come in well below its targeted deficit level, running at just 3.3 percent of gross domestic product (GDP) last month and more than a full percentage point below its 4.65 percent deficit target. Government revenue from taxes has also risen sharply so far this year, gaining 7.3 percent after being adjusted for inflation, putting the country on solid financial footing.

Considering this shift back towards fundamentals, I look for most Asian currencies to at least hold their own through the rest of the year. While India and Indonesia will remain challenged, most Asian nations are running current account surpluses and have accumulated large foreign exchange reserves, so there’s little likelihood of significant outflows.

I also look for the US dollar itself to begin depreciating with the advent of Janet Yellen. Her ultra-dovish stance will make the dollar less attractive as the US continues stimulating even as many world economies improve. Interest rates are likely to remain low for some time and will also play a role in dollar depreciation.

The upshot: Global investors should pay close attention to currency volatility in the coming months, while keeping in mind that it’s by no means a game changer.

Portfolio Roundup

Braskem SA (NYSE: BAK) reported that its third quarter net profit reached BRL391 million (USD172 million), versus a loss of BRL124 million in the year-ago period. Earnings before interest, taxes, depreciation and amortization rose 85 percent to BRL1.65 billion (USD720 million), a 42 percent sequential increase.

Net revenue was up by 12 percent in the quarter to USD4.7 billion, largely thanks to the Brazilian currency’s deprecation relative to the dollar. Over all, net revenues were 1.4 percent lower in dollar terms and 9 percent higher in reals. Export revenues were up by 9 percent to USD2.1 billion, thanks to higher resale volumes and higher average sales prices.

Demand for petrochemicals and Braskem’s “green” plastics should continue to improve along with the global economy, particularly as many packaging companies shift to more environmentally friendly materials.

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