How to Find Hidden Value in Emerging Markets Currencies

Emerging-markets currencies have begun 2013 in slightly better form than their equity counterparts. The JPMorgan Emerging Markets Currency index has risen 0.7 percent against the U.S. dollar so far this year, while the normally higher-beta emerging-markets equity market has been roughly flat. Moreov...

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Bibliographic Details
Published inInstitutional Investor
Main Author Hood, Michael
Format Trade Publication Article
LanguageEnglish
Published New York Euromoney Institutional Investor PLC 01.02.2013
Subjects
American dollar
Business conditions
Currency
Currency transactions
Emerging markets
Foreign exchange
Foreign exchange rates
International
Renminbi
Yen
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Summary:Emerging-markets currencies have begun 2013 in slightly better form than their equity counterparts. The JPMorgan Emerging Markets Currency index has risen 0.7 percent against the U.S. dollar so far this year, while the normally higher-beta emerging-markets equity market has been roughly flat. Moreover, emerging-markets currencies' mild appreciation against the dollar has come against the considerable headwind of yen weakness, which has generated additional gains for emerging-markets foreign exchange against a broader, trade-weighted basket. But even considering the improvement both this year and in late 2012, emerging-markets currencies remain well below previous peaks. The behavior of the index conceals significant divergences among individual currencies, though. A comparison of today's foreign exchange rates with pre-crisis levels offers a quick way to identify possible areas of cheapness for further study. Several currencies in this group have recovered only partially from their recession-era tumbles. Inflation differentials matter less for currencies today than in the era of high emerging-markets inflation (especially in Latin America). But both inflation and trade baskets deserve consideration in evaluating foreign exchange cheapness.
ISSN:0020-3580