Emerging market currencies to watch

Forex pairs including emerging market currencies – such as the Brazilian real, Russian ruble and Chinese renminbi – are often more volatile than those containing currencies from more developed nations, due to the effects of rapid economic change on currency valuations. Here we take a look at some of the biggest emerging market currencies and how you can trade them.

Data
Source: Bloomberg

What are emerging market currencies?

Emerging market currencies are those used within countries considered to be ‘emerging markets’ (EMs) – a term that has no precise definition but is generally considered to refer to nations that are in a state of transition between ‘developing’ and ‘developed’ status. Such countries have often had several years of robust economic growth, are expected to continue to grow rapidly and may be experiencing a period of political, social and demographic transition, which makes it easier to integrate with other economies globally.

There is no universally agreed list of emerging market currencies, as bodies including the IMF, FTSE, Goldman Sachs, Morgan Stanley, JPMorgan, Dow Jones, Russell and Columbia University all use slightly different metrics to categorise countries as emerging markets. However, the countries most commonly thought of as emerging are Brazil, Russia, India, China and South Africa – now collectively known by the acronym ‘BRICS’. The following are therefore generally considered to be emerging market currencies:

  • Brazilian real (BRL)
  • Russian ruble (RUB)
  • Indian rupee (INR)
  • Chinese renminbi (CNH)
  • South African rand (ZAR)

Here we take a look at each of the BRICS currencies in turn, and highlight the forex pairs you could consider trading if you want to gain exposure to the volatility they can offer.

Brazilian real (BRL)

The Brazilian real is the official currency of Brazil and the 19th most traded globally, accounting for an average daily volume of US$51 billion in 2016. It was introduced on 1 July 1994 as part of ‘Plano Real’, a plan to stabilise and grow the Brazilian economy and put an end to the country’s hyperinflation after 14 years. Since then, Brazil’s economy has grown by more than 2.5% a year on average, making it the world’s eighth largest economy. Its gross domestic product (GDP) is US$2.05 trillion.

The real has fluctuated substantially over the last few years due to changes in the political and economic situation in Brazil. The country was thrown into recession between 2015 and 2016 as a result of falling commodity prices and a political crisis that saw its president, Dilma Rousseff, impeached for manipulating government accounts.

USD/BRL (US dollar to Brazilian real): 2014-2018

The country returned to growth at a rate of 1% in 2017, but it remains to be seen if the worst of the crisis is over. Investor confidence has remained low in the first half of 2018, with the real falling against the dollar in response to reduced growth forecasts. However, the government is currently introducing policies designed to increase international investment and trade, with a view to boosting the economy – a potentially exciting area for growth, given that domestic consumption accounts for more than 83% of Brazil’s GDP. If it’s successful, the real could appreciate against other major currencies.

Markets to watch: USD/BRL and USD/BRL

Russian ruble (RUB)

The Russian ruble (sometimes spelt ‘rouble’) is the official currency of the Russian Federation and the 17th most traded globally, accounting for an average daily volume of US$58 billion in 2016. While a form of the ruble was first introduced in the 13th century, the modern ruble was issued by the Bank of Russia in 1991 after the collapse of the Soviet Union. It was redenominated between 1999 and 2001 as a result of rising inflation. The rate chosen was 1 to 1000 – meaning one newly issued ruble note was equivalent to 1000 of its older counterparts.

Since the currency was redenominated, Russia’s economy has grown by an average of 4% a year to a GDP of US$1.5 trillion in 2016. This makes it the 11th biggest economy according to the World Bank, and the 12th according to the IMF (due to differences in the methodology used to estimate GDP). Its economy is heavily dependent on exports of commodities including coal, oil and natural gas, so the ruble’s value is often closely correlated with commodity prices. During 2014 and 2015, for instance, Russia went into recession, with the ruble experiencing a corresponding drop in value against the dollar. This happened because global oil prices were tumbling and economic sanctions were imposed against Russia due to its annexation of Crimea and military intervention in Ukraine.

USD/RUB (US dollar to Russian ruble): 2014-2018

The country returned to growth in 2017, as GDP rose by 1.5%. Russia is currently pursuing growth through a course of ‘import substitution’, whereby it plans to replace foreign imports with its own goods. The idea is to increase domestic consumption of goods, which already account for more than 70% of GDP, to provide more of a buffer against changes in commodity prices and international sanctions in the future. If it’s successful, the ruble could appreciate against other major currencies.

Markets to watch: USD/RUB and EUR/RUB

Indian rupee (INR)

The Indian rupee is the official currency of the Republic of India. It is the 18th most traded currency globally, with an average daily volume of US$58 billion in 2016. The rupee can be traced back to a silver coin called the rupiya, issued by Sher Shah Suri between 1540 and 1545, with a version of the Indian currency in use ever since. Today it is issued by the Reserve Bank of India under the RBI Act 1934.

India’s economy is one of the fastest growing in the world, having averaged 7.1% annual GDP growth between 1998 and 2017. It is currently the sixth largest economy in the world, with a GDP of US$2.6 trillion. But despite this, the rupee has fallen against the dollar over the last five years. This is, in part, because the country imports the majority of its crude oil, which is priced in dollars. However, India has also faced challenges including a fall in credit growth (ie bank lending) due to a rise in bad debt, as well as several short-term shocks stemming from government policy. This included the ‘demonetisation’ of several bank notes in 2016, which made them invalid overnight – a major issue for a cash-reliant society such as India – as well as the introduction of a goods and services tax (GST).

USD/INR (US dollar to Indian rupee): 2013-2018

Despite these issues, the outlook for India is generally positive and its economy looks set to continue to grow rapidly over the next few years. This is especially likely if the government can increase the ease of doing business, develop its energy sector to reduce its reliance on imports, improve its infrastructure and encourage foreign investment – with the rupee likely to appreciate significantly against other major currencies if these areas are addressed.

Markets to watch: USD/INR and GBP/INR

Chinese renminbi (CNH)

The renminbi is the official currency of the People’s Republic of China and the eighth most traded globally, accounting for average daily volumes of US$260 billion in 2016. It is often referred to as the ‘yuan’, a subunit of the renminbi equivalent to one pound or dollar. The currency was first issued by the People’s Bank of China (PBoC) in 1948, approximately one year before the country became the People’s Republic of China.

The country’s GDP grew by an average of 9.1% annually between 1998 and 2017. China is currently the world’s second largest national economy with a GDP of US$12 trillion according to both the IMF and World Bank. However, critics have suggested that this growth has been fuelled by the country’s monetary policies, which they claim have kept its currency undervalued against the dollar and other major currencies – making its exports more competitive and enabling it to maintain a trade surplus with other major economies.

The renminbi was pegged against the dollar from 1994 to 2005, meaning its exchange rate was controlled by the PBoC. Research by the European Central Bank (ECB) suggests that a similar peg continued unofficially until at least 2010. While the PBoC now states that it will allow the renminbi to appreciate against a basket of major currencies over the next few years, with a view to allowing it to float freely in the future, many analysts believe that China continues to exert significant control over the currency’s valuation. This, coupled with changing US interest rates and economic policies under US President Donald Trump, has led to significant fluctuations in the value of USD/CNH over the last few years.

(US dollar to Chinese renminbi): 2015-2018

While China’s growth prospects continue to look favourable, there is currently a great deal of uncertainty surrounding the country’s future trading relationship with the US and other major economies. This is particularly true in the context of Trump’s trade war, plus a lack of clarity about its long-term exchange rate target. The renminbi could therefore remain volatile.

Markets to watch: USD/CNH, CNH/JPY, GBP/CNH and AUD/CNH

South African rand (ZAR)

The rand is the currency of the Republic of South Africa and the 20th most traded globally, accounting for average daily volumes of US$49 billion in 2016. The currency was launched in 1961 – replacing the South African pound – in response to a report by the Decimal Coinage Commission that called for South Africa to move to a decimalised currency system. It is issued by South African Reserve Bank.

Over the last 20 years, South Africa’s economy has grown by an average of 2.7% each year. This brings it to a GDP of US$350 billion in 2017, making it the world’s 32nd largest economy according to the IMF and 33rd according to the World Bank. However, growth has stalled to an average of just 1.1% over the last three years. This is primarily down to two reasons: the first is changing commodity prices, which fell throughout 2014 and 2015 before recovering some of their value from 2016 onwards; and the second is the steady rise of US interest rates since November 2015. The currency has also been highly sensitive to changes in the value of the Chinese renminbi, as China is South Africa’s top export market. The rand lost approximately 25% of its value against the dollar in the latter half of 2015, for example, after China devalued the renminbi by just a few percent in August of that year.

USD/ZAR (US dollar to South African rand): 2013-2018

While economic growth has stalled in South Africa over the last few years, the IMF recently revised its growth forecasts up to 1.5% and 1.7% for 2018 and 2019 respectively. This followed the election of new President Cyril Ramaphosa. It is hoped that he can implement policies to bolster economic growth and deal with South Africa’s key challenges, which the IMF report describes as ‘improving infrastructure; reducing barriers to entry in key sectors, including transportation and telecommunications; improving the efficiency of government spending; and reducing policy uncertainty … [as well as] raising productivity across the economy, and promoting job creation.’ With a return to growth expected, the rand could appreciate in the coming years, though this will depend on its resilience to changing US-China relations and evolving US monetary policies.

Markets to watch: USD/ZAR, GBP/ZAR and EUR/ZAR

How to trade emerging market currencies

You can gain exposure to emerging market currencies by trading the pairs listed above, or with a tracking index such as the MSCI Emerging Markets Currency Index via an ETF. This tracks the values of a basket of emerging market currencies including those listed above.

However, you should always carry out a thorough analysis of your chosen market before placing a trade, taking into account factors that can affect currency valuations. These include economic releases, monetary policy and credit ratings, among other factors. You can learn more about what moves forex markets in IG Academy.

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