2012 proved a modest year for emerging market (“EM”) currencies, as central bankers from Brasilia to Bangkok attempted to stimulate their economies through interest rate cuts. New asset purchases and policy guidance from the Federal Reserve have had the effect of lowering domestic interest rates and weakening the U.S. dollar compared to most other trading partners and currencies.
On average, EM currencies appreciated in 2012, compared to losses in 2011. However, 2013 may prove to be better than last year, provided such large economies as Brazil, Indonesia and South Africa rebound after currency losses in 2011 and 2012. We believe 2013 will be another year of developed market central bank activism that could provide positive tailwinds for EM currency investors.
After a quick turnaround in risk sentiment in the first few weeks of 2013, investors have done well by having exposure to most emerging market currencies to start the calendar year.
Focusing on 2012, many EM currencies appreciated against the U.S. dollar. Notable laggards included some of the largest emerging market economies, such as Brazil, South Africa and Indonesia. As seen in the table below, broad appreciation was seen in many currencies, but at varying speeds.
On average, investors with exposure to EM currencies were rewarded for taking more risk in 2012. In many instances, currencies that sold off the most in 2011 seemed to rally back at the fastest pace in 2012. Emerging markets in Europe, such as Hungary, rallied strongly after experiencing steep losses in 2011. While concerns about Europe are still in the back of investors’ minds, positive surprises in Europe in 2012 provided a constructive backdrop for currency appreciation in countries such as Poland, Turkey and Russia.
As a region, Asia saw its currencies appreciate at the slowest pace on average. However, a more subdued depreciation in 2011 meant that most Asian currencies have bounced back to levels seen at the end of 2010. Historically, Asian currencies have been less volatile than their Latin American or European counterparts. In uncertain market environments, this has been a benefit for investors. Many economists predict that Asian economies ex-Japan will grow at faster rates in 2013 than Latin America or Europe. Faster growth rates and increased economic output could provide a boost for their currencies in 2013.