After stumbling earlier this year, emerging market currency exchange traded funds have erased their losses, with traders jumping on cheap valuations and anticipating improved economic conditions in developing countries.
“Emerging FX is showing most impressive resilience,” Manik Narain, a strategist at UBS, said in a BusinessReport article. “There are a number of cross-currents at play here – hopes of Chinese stimulus, better EM current account data and possibly better valuations. The price action suggests a lot of investors are taking the view EM has already adjusted a lot and repriced enough.”
The broad WisdomTree Emerging Currency Fund (CEW) is now only down 0.25% so far this year after rallying 3.5% since the February 3 low.
CEW includes an equal-weight exposure to a group of currencies from emerging countries, including Indonesia, Turkey, Brazil, India, South Africa, Mexico, Colombia, Poland, Thailand, Malaysia, South Korea, Philippines, Chile, Russia and China.
Emerging market currencies are holding near multi-week highs.
Most emerging market currencies have turned around from the February 3 low. For instance, the Indonesia rupiah has appreciated 7% against the U.S. dollar, the Brazilian real has gained 7.4%, the Indian rupee is up 4.4% , the South African rand is 6.5% higher and the Mexican peso increased 3.5%.
Foreign investment flows into some markets, including Indonesia and India, has helped strengthen their respective currencies – foreign investors would drive up the demand for the local currency as they enter the local stock markets. [Rupee ETFs Strengthen as Foreign Investors Return to India]
Additionally, some central banks in the emerging markets hiked interest rates to combat rising inflation. For example, Brazil raised the benchmark lending rate to 10.75%. [Warming Up to Brazilian Bonds With ETFs]
Other countries are seeing their current accounts improve – a heavy deficit typically shows imports outpacing exports, which means the countries are demanding more foreign currency-denominated goods.
WisdomTree Emerging Currency Fund
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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.