17 Of 24 Emerging Market Currencies Have Appreciated This Year, Is The Rally Just Getting Started? 1

Emerging markets up 18.8% YTD! So far so good

Emerging market currencies have largely been on a roll this year. For the year as of May 25, we’ve seen a total of seventeen emerging market currencies (of a total of 24) record gains. Foreign exchange rate movements are affected by fund flows to a significant extent.

On a YTD (year-to-date) basis, we’ve seen emerging markets (VWO) stock markets largely outperforming the US and other developed markets. As of May 25, the iShares MSCI Emerging Markets ETF (EEM) was up 18.8%, as compared to the SPDR S&P 500 ETF (SPY), which returned 8.2% to investors and the developed markets tracking iShares MSCI EAFE Index ETF (EFA) which gained 14.7% for the year. According to HSBC: Emerging Market Equities Could Gain 20% Through Year-End. Investors piling into these emerging market assets has also led to an appreciation in emerging market currencies against the greenback (US dollar (UUP)).

The Mexican peso leads the emerging-market currencies rally

The chart above depicts the 24 emerging market currencies we analyzed. The list is comprised of countries in the MSCI emerging market index classification. The chart above clearly depicts the surge in the majority of emerging market currencies so for in the year.

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The Mexican peso has been leading the rally, appreciating by 12.7% YTD (as of May 25). This is despite the protectionist pledges by the US President Donald Trump who assumed office the White House at the beginning of the year. While the markets expected the withdrawal by the United States from the TPP to impact Mexico back in January, it turns out that no barriers have been able to arrest the rise of the Mexican Peso.

The Polish zloty is another forerunner with 12.7% appreciation YTD. The Czech koruna, Russian ruble, and Korean won follow next with 9.1%, 9.1%, and 7.9% appreciation recorded, respectively for the year so far.

Currencies against the trend

Currencies that have swayed against the general trend in the emerging market currency basket are: the Turkish lira, which has depreciated by 0.9%; the Brazilian real which is down by 0.7%, and the Philippine peso, the Chilean peso, and the Qatari riyal, which have depreciated by 0.5%, 0.3%, and 0.003, respectively YTD.

While emerging market currencies have largely been on a tear, is it time now to get cautious about the high tide? The next part of this series explains.

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