Emerging market currencies enjoy stellar March

Emerging market currencies are on course to finish March with bumper gains, with some now up more than 10 per cent for the year, as a faltering dollar and resilience in emerging market economies defy fears of a testing first quarter.

The Mexican peso has led the way with a gain of almost 8 per cent in February, making it the biggest beneficiary of a dollar that has sagged thanks to signals from the Federal Reserve that it would tighten monetary policy only at a gentle pace and doubts over whether Donald Trump will deliver tax cuts and fiscal stimulus.

Thanks to a stronger oil price, Russia’s rouble has almost matched the peso’s performance in 2017 with an 8.9 per cent rise against the dollar. The currency touched its strongest level since July 2015 on Thursday, reaching Rbs56.35 per dollar. Crude oil is one of Russia’s main exports.

Geoffrey Yu, head of UBS’s UK wealth management office and a currency specialist, said that there is a “genuine demand impulse” for EM currencies and other commodity-linked currencies which were “responding to signs of robust growth in China”.

He also pointed out that the dollar was already “looking stretched” after a two-year rally before doubts about the Trump trade hardened this month.

“The failure to get healthcare legislation through was a wake-up call for dollar bulls, and it came along with signs that the Federal Reserve is not prepared to take monetary policy beyond what was already priced in,” Mr Yu said.

The robust rebound for EM currencies has been strong enough to lift the rand this year, even though its political headwinds have intensified this week. Signs of support from cabinet ministers for Pravin Gordhan, South Africa’s well-regarded finance minister — who is at the centre of a dispute with Jacob Zuma, its president — helped the rand find support on Thursday after a bruising start to the week. It rose 0.9 per cent, with R12.91 needed to buy a dollar. It is 5 per cent stronger over the year.

Analysts at Goldman Sachs highlighted a general trend for “more stable finances and fewer economic crises” among emerging markets in recent analysis. The bank noted that emerging markets’ net international investment positions, in other words foreign assets minus foreign liabilities, had improved and economies had cut their net foreign currency exposures.

“Together with the recent improvement in EM current account balances, we argue that EM economies are less susceptible to the funding shocks often associated with rising US interest rates,” Goldman’s analysis argued.

Meanwhile, UBS’s Mr Yu said that overall, he remained “cautiously optimistic on EM currencies” moving into the second quarter of 2017. He recommended continued exposure to “the four Rs”, namely the real, the rupee, the rouble and the rand.

The advance across EM currencies in March has extended to the Turkish lira, which investors have largely shunned this year because of a slowing economy, rising inflation and concern about an increasingly autocratic government. It has edged 0.2 per cent higher against the dollar this month but remains 3.3 per cent weaker for the year.