Emerging market currencies head for six-year highs
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Emerging market currencies have recovered to their pre-taper tantrum peak and were making further gains on Thursday morning, lifting a key index close to its highest level in more than six years.
The MSCI Emerging Markets Currency Index ended trading on Wednesday at 1687.07, its highest level since early May 2013 – shortly before the then Federal Reserve chair Ben Bernanke sparked the so-called “taper tantrum” by unexpectedly suggesting the Fed could start rolling back its quantitative easing policy.
The index – which is based on a basket of emerging market currencies – lost more than five per cent of its value over the following two months and struggled to build a sustained recovery over the next few years as commodity prices slumped.
However, EM assets have recovered since early 2016, and a particularly strong end to 2017 and bumper first week of 2018 has pushed the index within sight of its highest level since August 2011 – when the extent of Europe’s sovereign debt crisis sparked widespread selling across markets.
Most EM currencies were making further gains across the board on Thursday morning. The Turkish lira climbed 0.6 per cent against the dollar, while the rand climbed 0.5 per cent and the Mexican peso gained 0.4 per cent. (The wobbly dollar is of course helping here.)
MSCI’s index is heavily weighted toward emerging markets in Asia, meaning it has also benefited from China’s unexpected economic resilience over recent months. Other popular indices such as JP Morgan’s EM currency measure, in contrast, have not recovered as quickly.
Analysts at Bank of America Merrill Lynch this week noted that overall fundamentals across emerging markets remained “solid”, despite vulnerabilities in some individual countries such as South Africa and Turkey.
The optimism has fed through into equity markets, with MSCI’s main emerging market stock index already at its highest level since 2011, and picking up further gains this week. At the national level, Turkey’s Bist 100 and Brazil’s Bovespa both hit all-time highs earlier this week.
Ross Teverson, manager of Jupiter Asset Management’s Global Emerging Markets Fund, predicted at the end of last year that the recent rally still has some space to run, noting that “with the backdrop of continued earnings growth for emerging markets as a whole, and a number of tailwinds powering the sector forward, we believe a strong case can still be made for emerging and frontier market equities”.
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