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Demand For Emerging Market Assets Bolsters Currency ETFs

Large institutional investors have rushed into developing economies, strengthening emerging market currencies and related exchange traded funds.

Since the European Central Bank is enacting monetary easing, global bond investors have switched from Eurozone periphery assets to emerging markets, Financial Times reports.

Richard Cochinos, a strategist at Citigroup, points out that institutional investors are acquiring emerging market assets, notably in Asia, on a scale that the bank’s client flow data had never seen before.

“We don’t see them selling out of these positions,” Cochinos.

Emerging market currency ETFs have strengthened this year, with the WisdomTree Emerging Currency Strategy Fund (CEW) , which tracks up a group of eastern European, African, Latin American and Asian currencies, is up 1.7% year-to-date. Additionally, the iPath GEMS Index ETN (JEM) , which also tracks a broad basket of emerging market currencies, is up 2.4% so far this year.

Meanwhile, the iPath GEMS Asia 8 ETN (AYT) , which focuses on Asian currencies, including the Indonesian rupiah, the Indian rupee, the Philippine peso, the South Korean won, the Thai baht, the Malaysian ringgit, the Taiwanese dollar and the Chinese yuan, is up 3.0% this year.

In comparison, the PowerShares DB U.S. Dollar Index Bullish Fund (UUP) rose 1.1% year-to-date.

“Investors are in a feeding frenzy for EM assets,” Tim Ash, economist at Standard Bank, said in the article. “As uncertainty has risen over Russia, investors have been squeezed into everything else.”

Emerging market currencies are strengthening on the greater demand for developing market assets – foreign investors would have to convert their currencies to acquire local-currency denominated assets.

Looking at the developing countries, real interest rates are higher and current account deficits have shrunk. Additionally, several central banks are increasing their foreign exchange reserves to buffer potential sell-offs.

For more information on global currencies, visit our currency ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.