The emerging markets currency party
While investors in emerging markets (EEM) (VWO) continue to enjoy the surge in currencies so far this year, many are beginning to look for structural weaknesses. The WisdomTree Dreyfus Emerging Currency Strategy ETF (CEW), the WisdomTree Chinese Yuan Strategy ETF (CYB), and the Market Vectors-Indian Rupee/USD ETN (INR) are just a few of the listed funds invested in emerging markets currency. Returns from these funds so far this year are charted below:
| Ticker | Fund | YTD Return (as of May 25) |
| CEW | WisdomTree Dreyfus Emerging Currency Strategy ETF | 6.55% |
| CYB | WisdomTree Chinese Yuan Strategy ETF | 4.6% |
| INR | Market Vectors-Indian Rupee/USD ETN | 8.79% |
Local-currency debt has soared
The surge in emerging markets currencies is also behind the attractiveness of emerging market local-currency debt. The iShares Emerging Markets Local Currency Bond ETF (LEMB) and the Market Vectors Emerging Markets Local ETF (EMLC) have returned 8.2% and 6.9%, respectively, YTD (as of May 25). 2016 saw a record $506 billion of local-currency emerging market bond issuances, up 32.5% from 2015, according to Bloomberg data. And, we’re seeing investors continuing to pile into emerging market debt this year.
What could bring the rally to an end?
However, those invested in emerging markets currency remain watchful of the peak. Three things that could reverse the trend easily are:
- US growth (SPY) (IWM) momentum accelerating, leading to a stronger US dollar (UUP)
- Volatility in commodity prices
- Change in investor sentiment towards emerging market assets
In this series, we’ll review three charts which seem to signal that the emerging markets currency surge may be on it’s last leg. Let’s begin with the emerging markets currency-commodity spread, as discussed in the next part of this series.
