While no silver bullet exists, it is interesting that the vast majority of emerging market countries with “undervalued” currencies are predominantly export-based economies. Therefore, as their currencies depreciate, their goods actually become cheaper to foreign buyers. On the other hand, the price of imported goods increases, which leads to the potential for an increase in inflation. It has long been said that it is important for a larger economy such as China to move up the value chain and transition to a more domestic-consumption-focused economy. While an appreciating currency may make China’s exports comparatively more expensive, it will gradually increase the foreign purchasing power of Chinese consumers. If appreciation occurs in a gradual way, a strengthening currency can be a positive factor for foreign investors and local consumers at the same time.
Although the recent period of volatility has proven difficult for many investors, we believe there is potential for long-term value in diversifying the currency risk of their portfolios. At current levels, investors might consider learning more about different ways of altering the currency risk profile of their portfolios through foreign-currency exchange-traded funds.
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.