The strengthening U.S. dollar is again having an adverse impact on some familiar and fragile emerging markets currencies and the corresponding exchange traded funds.
Heading into the start of trading Thursday, the PowerShares DB US Dollar Index Bullish Fund (UUP) was up 1.1% to start 2014, but the greenback’s strength means more than just increased purchasing power for Americans. It means a continuation of the savage repudiation of some emerging markets currencies seen last year. Front and center in that repudiation are the South African rand and the Turkish lira. [Tapering Could Slam These EM Currencies]
Amid ongoing political strife in Turkey, the lira hit a record low against the greenback Thursday, aiding in the 3.2% decline for the iShares MSCI Turkey ETF (TUR). Volume in TUR is already above the daily average. TUR’s woes come after the country ranked as the fourth-worst global equity market in the world last year. Only Peru, Brazil and Chile were worse, according to Bespoke Investment Group.
Although the rand sank to a five-year low against the dollar, the iShares MSCI South Africa ETF (EZA) fell just half a percent. However, the ETF is still saddled with a year-to-date loss approaching 6%. That decline is all the more troublesome when considering that South Africa is one of the largest gold producers and bullion and mining shares have traded higher this year.
EZA’s 2014 performance is nearly five times worse than that of the iShares MSCI All Peru Capped ETF (EPU) , another emerging markets single-country fund with an intimate correlation to precious metals prices. [Peru ETF Gets a Lift From Mining Rally]
“The lira and the rand have slumped to a series of lows early in 2014. The currencies are among those considered most vulnerable to a rise in U.S. interest rates as the Federal Reserve winds down its monetary stimulus. The lira and the rand rely on fickle flows of foreign money to fund their yawning current account deficits,” reports Tommy Stubbington for the Wall Street Journal.
TUR tipped investors to the fact that it could be volatile once again in 2014. TUR was under duress for much of 2013 due to tapering speculation and Turkey’s own bouts with political instability, but the ETF plunged 13% in December alone and investors pulled over $100 million from the ETF last year. [Thailand, Turkey ETFs Tumble to Start 2014]
iShares MSCI Turkey ETF