Latin American currencies performed well in 2012, with the notable exception of the Brazilian real. After a series of interest rate cuts from 12.50% in September 2011 down to 7.25% in November 2012, the stimulus of the previous year could finally begin to have an effect on the Brazilian economy. Better-than-forecast economic growth could see the Brazilian real appreciate against the U.S. dollar in 2013. In Latin America, another currency poised to continue its upward trend in 2013 could be the Mexican peso. In an environment where the U.S. economy continues to grow at faster rates than developed economies in Europe, Mexico could continue to be a net beneficiary.
While currency movements can be the primary driver of investor returns in non-deliverable forward currency contracts, it is also worth highlighting that even though many emerging market central banks have cut interest rates to stimulate their economies, local interest rates still remain four times higher on average than in the United States. After an active 2012, we believe that the bulk of interest rate cuts in emerging markets have already occurred. For investors in locally denominated debt funds (WisdomTree Emerging Markets Local Debt Fund – ELD or WisdomTree Asia Local Debt Fund – ALD) or EM currency funds (WisdomTree Emerging Currency Fund – CEW)1, we expect returns from currency appreciation and interest income to be more balanced than in 2012.
In light of explicit pledges from developed market central banks to continue accommodative monetary policy, faster-growing economies such as emerging markets could be the net beneficiary in 2013, as investors shift to into higher-yielding, riskier assets. With EM central banks largely on hold, the absence of stimulus from them could remove a potential cause of currency weakness that dampened returns in 2012. For investors that are still underexposed to international currency and fixed income, 2013 could prove to be a great year for gaining exposure to faster-growing economies around the world.
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.
1Although CEW invests in very short-term, investment grade instruments, the Fund is not a “money market” Fund and it is not the objective of the Fund to maintain a constant share price.