FXStreet (Bali) - Following so of the strongest short term gains in EM currencies since 1998, Paul Mackel, Head of EM FX Research at HSBC, and his team, make the case for this year's emerging market currencies status to be defined as a sell-off cycle rather than a crisis. Key Quotes The FX market has been hunting for an EM currency crisis when many conditions that we have seen in the past do not exist today. The transmission mechanism to an EM currency crisis is different now, in a low inflation environment. Also critically different from before is that currency regimes across EM economies have become less rigid, and assetliability and currency mismatches are lower, especially for EM sovereigns. In a nutshell, the FX market was running ahead of itself given capital outflows have not been aggressive. However, we should not swing from extreme pessimism to extreme optimism. A sensible but cautious tone is still warranted. EM currencies face headwinds from weak global and intra-EM trade, low global commodity prices, high levels of total debt for some and slowing credit conditions for others, as well as idiosyncratic political uncertainties in a few areas. Prior to the release of the September US non-farm payrolls on 2 October, EM FX was set for its worst yearly performance against the USD since 2008. Indeed, the scale of the recent decline had encouraged many to compare the current situation to that last seen in previous EM crises such as the 1994 ‘Tequila crisis’ and 1997 Asian financial crisis. However, suddenly, EM currencies returned some of the biggest short-term gains since 1998. Many believe EM currencies rebounded because we should fear the Fed less and China’s growth may soon stabilise. These arguments are fair enough, but we believe the underlying reason is a lack of inflation globally. This means lower core bond yields for longer, capping debt servicing costs and foreign capital reversal for EM economies. Also, EM central banks need not tighten monetary conditions via rate hikes and FX reserve depletion, as they did in the 1990s. Instead, many of them have been loosening policy to support growth. For more information, read our latest forex news.