Emerging Market Currencies Q1 Rally Reaches Historic Proportions


April 7, 2016 [Emerging Markets, Economy, MSCI EM Index]

Stabilizing dollar gives a particular boost to currencies of commodities-linked emerging market exporters. Beware exogenous drivers of rallies.

Moscow, Russia

As a follow-up to the previous Emerging Views post on the first-quarter rally in emerging market stocks, the best-performing group among global equities in the period, the role and extent of currency dynamics is worth highlighting. In the wake of the Global Financial Crisis (GFC), major central bank monetary policy—the primary driver of those dynamics—has heavily influenced markets in various, and at times surprising, ways. Given the unprecedented monetary stimulus in the form of ZIRP (zero interest rate policy), QE (quantitative easing) and more recently NIRP (negative interest rate policy), we decided to create a hypothetical currency index last year to analyze the impact of currency movements on emerging market equity returns.

Briefly, we took the composition of the MSCI EM Index dating back to January 1st of 1995. Starting with $100 dollars allocated to the currencies of index country members based on the initial index country weights, we then rebalanced the investment at the beginning of each year since, based on country and country weighting changes in the benchmark. Judging from the movements in the hypothetical currency index, the first-quarter rally in emerging market currencies against the dollar was remarkable:

  • The hypothetical index rallied 4.7% in March, which ranks as the largest monthly rally since the index's January 1, 1995 inception. The monthly rally was larger than the March and May 2009 rallies of 4.0% and 4.3%, respectively, when markets began rebounding from the trough of the GFC. Indeed, there have only been nine months in which the index has rallied more than 3% in a total of 255 counts. That's just 3.2% of the months observed.
  • In order of magnitude, the top-performing currencies in the first quarter were the Brazilian real (+11.9%); the Russian ruble (+11.2%); and the Colombian peso (+9.7%). Noticeably, all three are major commodities exporters. But even non-commodity emerging market exporters saw significant currency gains. The Korean won, for example, appreciated 8.1% in March 2016.
  • The 11.9% rally in the Brazilian real was the sharpest since 2003 and the third-largest going back to 1995. The 11.2% ruble rally has only been surpassed once, in April 2015, when the Russian unit rallied 12.7%.
  • In six of the eight prior observations, the index rose six months later, a 75% hit rate. Interestingly, the last two observations have resulted in negative index returns six months later.
  • Looking at the GFC experience, the index bottomed at 88.08 at the end of Feb 2009 and peaked at 113.63 in April 2011. That was a 28% rally. The rally this time around has so far been 4.7%, or just 16% of the GFC rally. The decline from peak to trough in the GFC was 21% before the index recovered all of its gains. The peak-to-trough drawdown in this cycle has been 31%.

The first-quarter EM currency rally was clearly quite historic, and the data suggest that it may have steam left. As we've noted in previous posts, emerging market equities stand to benefit meaningfully in a world of dollar-based EM earnings growth, which would represent a reversal of the trend in recent years.


The performance data quoted represents past performance; it does not guarantee future results.

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