Emerging market currencies, excepting the Chinese renminbi, have given up all their gains since 2002, which marked the start of the commodities upturn, raising the question of whether the strong performance of developing economies during 2002-13 was all about commodities after all.
Data from Credit Suisse show that EM currencies at large have returned to a discount of more than 60 per cent to the dollar in purchasing power parity terms, a sharp rebound from the 40 per cent discount in 2011.
“The commodity supercycle started in 2002. That supercycle has ended and it’s not coming back, so it seems natural that we should be seeing a return to 2002 levels if not beyond,” said Win Thin, global head of EM currency strategy at Brown Brothers Harriman. “
“During this whole commodity boom, everyone was saying it’s great fundamentals [in EMs], countries doing the right thing. I think I?.?.?.?underweighted the commodity effect.”
Daniel Tenengauzer, head of EM and global FX strategy at RBC Capital Markets, takes a different view. During the commodity bull market of 2002-12 “many [EM] economies were operating current account surpluses”, he says.
“They were implementing inflation-targeting regimes very strictly and strengthening their balance sheets, both external and domestic, so they were accumulating reserves.”
The commodity price slump could not explain the full retracement in EM currencies if it was not the only factor behind the upswing, Mr Tenengauzer said. “The flows of funds [into EMs] triggered resource misallocation.”
But, to Mr Tenegauzer, the slump in EM currencies is not a problem. “When the macro picture started to deteriorate there was a mechanism, a weak exchange rate. It’s part of the solution, not a problem.”
Mr Thin says some countries, such as Mexico, Chile, Taiwan, Poland, the Czech Republic and the Philippines, “were doing the right thing” during the boom years. “They didn’t waste all this money; they tucked some away for a rainy day.”
As a result, he said, some were avoiding the worst of the sell-off, with the Taiwan dollar down just 2.8 per cent against a resurgent greenback this year, and the Czech koruna, Polish zloty and Philippine peso off less than 5 per cent, though the Mexican and Chilean pesos had suffered double-digit declines.
Credit Suisse said some currencies appeared abnormally cheap. based on its analysis of currency valuations and debt vulnerability, the Swiss bank saw opportunities in South Africa, Malaysia and India.
Mr Tenengauzer also looks favourably on the India rupee, and says the Mexican peso and Indonesian rupiah are “starting to look attractive”.
But he says the currencies of two largest emerging economies, China and Brazil, each remain about 10 per cent overvalued. Given their importance, sentiment towards these two giants would continue to sour the wider EM outlook for the time being, he said.
