For years, the world’s leading emerging economies have seen their currencies in a tailspin. The Indian rupee, Chinese renminbi, Brazilian real, and Russian ruble all have declined by more than 20 percent from 2012 to 2016. While not the only reason, it is one reason why the U.S. dollar recovered in global markets even with the Federal Reserve’s enormous quantitative easing programs.
Another effect Fed’s easy money policy had on the economy was the introduction of extremely-low interest rates from 2007 to 2016. Income investors weren’t looking at traditional savings vehicles, like certificates of deposit (CDs) and Treasury bonds, instead favoring stocks and high-yield bonds.
At one time the emerging market debt was thought to be an attractive investment. At one time bonds in Brazil Indonesia, and Russia were thought to be winners because of the higher than nominal returns, but then the disastrous inflation in these countries turned their bonds into big-time losses. In Argentina, it was even worse, which is now shut out of bond markets, along with Venezuela.
How does a currency appreciate?
Currencies trade is in relative prices in the international markets because, in theory, the world operates through what’s called a floating exchange rate regime. When the U.S. dollar loses 2 percent of its purchasing power, while at the same time the Russian ruble loses 5 percent of its purchasing power, then the dollar should strengthen against the ruble. American investors need to try to find emerging market currencies that won’t lose as much purchasing power as the dollar during 2017.
Two things can happen that will make a currency worth more (more valuable).
- A reduction in the currency’s circulation will cause it to be worth more. If there are fewer yuan out there on the international system, each remaining yuan will be worth that much more as the supply decreases.
- An increase in the home economy’s labor productivity. For example, an oil-rich nation like Russia will have their ruble go up in value if there is an increase in production by Russian oil exporters.
When a currency is strong, it will raise income, help the bond holders, and make foreign goods affordable. The flip to that is that if a currency is rising it means it is likely harder to pay off debt or sell in the foreign markets.
#1 South Korea: the won
When it comes to the Asia-Pacific region, South Korea has one of the most sound and productive economies in the area. Since it’s peaked in early 2014, the Korean won lost nearly 15 percent against the U.S. dollar. Low debt-to-GDP figures for the South Korean government will likely ease pressure to print tons of new money.
#2 Poland: the złoty
Poland expects the last quarter to be healthier than any other time in the last five years. The country has a strong labor market and business confidence is on the rise. The combination of impressive domestic demands, increasing productivity, and low inflation has resulted in the likelihood of the Polish złoty rising throughout 2017.
#3 Indonesia: the rupiah
The Indonesian rupiah is a momentum play and unlike the forint, won, or złoty, it is not backed by serious fundamentals. It was trading at record lows against the dollar and then at the end of the year had a significant rebound. You should keep your eye on this currency, especially if commodity prices rebound.
#4 India: the rupee
The rupee is riskier than other emerging market currencies which are related to India’s problems with inflation and their uncertain monetary policy. The Indian government finds itself torn between having to fight high prices and trying to devalue to promote Keynesian-style growth programs.
That said, the rupee did outperform pretty much every other emerging market currency on a risk-adjusted basis in 2016 largely because of the high-interest rates. This year the rupee offers a 7.5 percent deposit rate.
#5 Hungary: the forint
Currently, Hungary has a low-interest rate problem, with numerous underlying economic concerns. Since mid-2012, the Hungarian forint has performed commendably in Forex markets and it may experience inflows from investors running from India and Russia.
What currency will be the first to rise? Tell us your opinions in the comments and check out how consumer prices in USA saw the biggest gain 3 years and learn how the government can create new jobs.