Emerging market currencies have benefited in 2017 as the US dollar index has depreciated by 7 per cent from its February peak while central banks have continued to finance the surge in global liquidity. As carry/volatility ratios tanked, high yield currencies like the Indian rupee, Russian rouble (despite the oil crash) and Indonesian rupiah were bid up in Planet Forex. Even the June payrolls number and fall in retail sales seemed to reinforce the bullish case in emerging markets currencies. While 222,000 new jobs in June and 4.4 per cent unemployment rate suggest the Federal Reserve has reached the limits of its dual mandate, average hourly earnings are muted. This macro milieu does not suggest an aggressive pace of US central bank tightening and balance sheet "normalisation". In fact, real interest rates have risen since the June FOMC, as symbolised by the almost $100 an ounce fall in the price of gold below its $1300 peak in 2017.

However, central bank policy may not be so benign for emerging markets much longer. German Bund yields doubled after ECB President Mario Draghi just hinted at a potential taper of its easy money policies. The bribery allegations against Brazil's reformist President Michel Temer triggered a free fall in Brazil's Bovespa index, local sovereign debt and the Brazilian Real. President Duterte's war against militants in Mindanao has caused the Philippine peso to fall to 50 as investors dump Manila shares. Once the Federal Reserve begins to shrink its $4.5 trillion balance sheet, it is entirely possible that volatility will rise across asset classes in the global markets. The May-June 2013 "taper tantrum" was traumatic for emerging markets, as the MSCI index plunged 15 per cent after Ben Bernanke just voiced the idea of an eventual reversal of post Lehman quantitative easing (QE) largesse.

It is possible that a 2017 "taper tantrum" and a trauma in emerging markets unsettles global markets this autumn. A spike in US Treasury, German Bund and British gilt government bond yields since June is Count Dracula's cross of gold to emerging market debt, equities and foreign exchange. As central banks restrain money supply growth, volatility and risk premia will rise, to the detriment of emerging markets. Of course, higher interest rates in the West were the trigger for successive emerging markets crises since the late 1990s, with cross-asset contagion a lethal endgame. This was the lesson of the 1994 Mexican peso crisis, the 1997 Asian flu, the 1998 Russian rouble default, the 2000 Turkish banking collapse, the 2001 Argentine default and the emerging market dominoes of 2008, 2011 and 2013.

I do not buy the "this time it is different" argument made by apologists of emerging markets investing. Event risk can prove fatal in some of the riskiest, most illiquid financial markets in the world. Egypt was forced into a draconian devaluation after President President Abdel-Fattah El Sisi decided to accept a $12 billion IMF loan. Pakistan's rupee fell 3 per cent on recent rumours that low hard currency reserves would force Islamabad to devalue its currency amid a political crisis caused by revelations that Prime Minister Nawaz Sheriff used Panamanian shell companies to buy luxury flats in London.

Nigerian President Buhari's botched devaluation of the naira has plunged Africa's largest economy into deep recession. South African President Jacob Zuma's decision to fire his respected Finance Minister led to a global run on the rand. Malaysia's ringgit trades at its 1998 Asian flu lows after the loss of investor confidence amid the 1MDB scandal and soft oil/LNG prices. Emerging markets investing is not for the naïve or the risk averse.

The J.P. Morgan emerging market index has easily outperformed the US dollar in 2017, despite three rate rises by the Yellen Fed, only because the financial markets have lost confidence in President Trump's fiscal stimulus/tax reform agenda. The first synchronized global economic recovery since 2009 and a rebound in cross-border trade was also bullish ballast for emerging market currencies.

The Indian rupee remains my favourite emerging market currency against the US dollar, ideally at 65. Prime Minister Narendra Modi's win in the UP state elections means no real political risk to the reformist BJP government till 2023. The collapse in oil prices is a $50 billion windfall for the Indian current account deficit. GST will boost to India's stellar 7 per cent GDP growth rate. With the repo rate at 6.75 per cent and inflation rate at 3 per cent, Indian government debt offers one of the most attractive risk-reward ratios in emerging markets. As offshore capital inflows accelerate in Dalal Street, the Indian rupee could well rise to 62 against the US dollar.