THE BOTTOM LINE
- So far this year, emerging market currencies (EM) have demonstrated their sensitivity to global economic trends, falling rapidly as short-term capital flows toward the U.S. to take advantage of rising short-term interest rates – and driving the greenback to levels not seen in over a year on a trade-weighted basis.
- In addition to interest rate differentials, currencies like the Argentine peso, the Turkish lira, the Brazilian real, the Mexican peso and the South African rand have each reflected their economies’ own internal challenges as well as their exposure to the rising dollar, not least through the dollar-denominated price of oil. Since the beginning of Q2 2018, these five currencies have fallen -28.0%, -16.6%, -13.4%, -12.9% and -12.0% respectively against the U.S. dollar.
- Little surprise, then that these descents have been accompanied by rising volatility. Since the middle of March, when it became clear that the Federal Reserve was committed to “normalizing” its benchmark target rate to post-2008 levels, EM currency volatility has broken away from the volatility of the more sedate G-7 currency group.
- In times of rising currency volatility, it’s easy to lose track of the economic fundamentals of many – but clearly not all – EM economies, where the transition to services-led economies from raw-materials providers have reached a tipping point.
- When upward-bound economies are over-discounted by global volatility trends, the difference represents a potential opportunity to astute, active investors driven by commitment to emerging markets and a keen sense of the strong fundamentals to be found by looking past the noise.