Emerging Market Currencies Still Have Room to Rise

Emerging market economies must be whining about their currencies for a good reason. Why else would they spend billions intervening in forex markets and risk provoking a global trade war?

As it turns out, however, the rise in emerging market currencies has been greatly exaggerated. Over the last twelve months, the Brazilian Real is flat against the Dollar. The Korean Won has risen a mere 2%. The Indian Rupee has risen 4%, the Mexican Peso has appreciated 5%, and the standout of emerging markets – the Thai Baht – has notched a solid 10%. Impressive, but hardly enough to raise eyebrows, and barely keeping pace with the S&P 500. Not to mention that if you measure their returns against stronger currencies (i.e. not the Dollar) or on a trade-weighted basis, the performance of emerging market currencies in 2010 was actually pretty mediocre.

Perhaps that explains why so many analysts are still pretty bullish. Economic growth in emerging markets is showing no signs of abating: Standard Chartered Bank“expects emerging economies to account for 68 per cent of global growth by 2030 and forecasts China’s economy to expand at an annual average rate of 6.9 per cent over that period, even as the US and Europe grow at a much slower pace of 2.5 per cent.”

Emerging Market Currencies Still Have Room to Rise

Emerging market economies must be whining about their currencies for a good reason. Why else would they spend billions intervening in forex markets and risk provoking a global trade war?

As it turns out, however, the rise in emerging market currencies has been greatly exaggerated. Over the last twelve months, the Brazilian Real is flat against the Dollar. The Korean Won has risen a mere 2%. The Indian Rupee has risen 4%, the Mexican Peso has appreciated 5%, and the standout of emerging markets – the Thai Baht – has notched a solid 10%. Impressive, but hardly enough to raise eyebrows, and barely keeping pace with the S&P 500. Not to mention that if you measure their returns against stronger currencies (i.e. not the Dollar) or on a trade-weighted basis, the performance of emerging market currencies in 2010 was actually pretty mediocre.

Perhaps that explains why so many analysts are still pretty bullish. Economic growth in emerging markets is showing no signs of abating: Standard Chartered Bank“expects emerging economies to account for 68 per cent of global growth by 2030 and forecasts China’s economy to expand at an annual average rate of 6.9 per cent over that period, even as the US and Europe grow at a much slower pace of 2.5 per cent.”

Chinese Yuan Will Not Be Reserve Currency?

In a recent editorial reprinted in The Business Insider (Here’s Why The Yuan Will Never Be The World’s Reserve Currency), China expert Michael Pettis argued forcefully against the notion that the Chinese Yuan will be ever be a global reserve currency on par with the US Dollar. By his own admission, Pettis seeks to counter the claim that China’s rise is inevitable.
The core of Pettis’s argument is that it is arithmetically unlikely – if not impossible – that the Chinese Yuan will become a reserve currency in the next few decades. He explains that in order for this to happen, China would have to either run a large and continuous current account deficit, or foreign capital inflows into China would have to be matched by Chinese capital outflows.” Why is this the case? Simply, a reserve currency must necessarily offer (foreign) institutions ample opportunity to accumulate it.

New Zealand: No Forex Intervention

Despite reaching a temporary stalemate, the currency war rages on, and individual countries continue to debate whether they should enter or watch their currencies continue to appreciate. Nowhere is that debate stronger than in New Zealand, whose Kiwi currency has fallen 37% against the US Dollar since its peak in early 2009, and over 15% since June of this year.

New Zealand: No Forex Intervention

Despite reaching a temporary stalemate, the currency war rages on, and individual countries continue to debate whether they should enter or watch their currencies continue to appreciate. Nowhere is that debate stronger than in New Zealand, whose Kiwi currency has fallen 37% against the US Dollar since its peak in early 2009, and over 15% since June of this year.

Currency War Will End in Tears

The “currency war” is heating up, and all parties are pinning their hopes on the G20 summit in South Korea. However, this is reason to believe that the meeting will fail to achieve anything in this regard, and that the cycle of “Beggar-thy-Neighbor” currency devaluations will continue.
There have been a handful of developments since the my last analysis of the currency war. First of all, more Central Banks (and hence, more currencies) are now affected. In the last week, Argentina pledged to continue its interventions into 2011, while Taiwan, and India – among other less prominent countries – have hinted towards imminent involvement.

Fed Surprises Markets with Scope of QE2

For the last few months, and especially over the last few weeks, the financial markets have been obsessed with the rumored expansion of the Fed’s Quantitative Easing program (“QE2″). With the prospect of another $1 Trillion in newly minted money hitting the markets, investors presumptively piled into stocks, commodities, and other high-risk assets, and simultaneously sold the US Dollar in favor of higher-yielding alternatives.

Currency Wars: Will Everyone Please Stop Whining!

I read a provocative piece the other day by Michael Hudson (“Why the U.S. Has Launched a New Financial World War — and How the Rest of the World Will Fight Back“), in which he argued that the ongoing currency wars are the fault of the US. Below, I’ll explain why he’s both right and wrong, and why he (and everyone else) should shut up and stop complaining.

Currency Wars: Will Everyone Please Stop Whining!

I read a provocative piece the other day by Michael Hudson (“Why the U.S. Has Launched a New Financial World War — and How the Rest of the World Will Fight Back“), in which he argued that the ongoing currency wars are the fault of the US. Below, I’ll explain why he’s both right and wrong, and why he (and everyone else) should shut up and stop complaining.

Currency Wars: Will Everyone Please Stop Whining!

I read a provocative piece the other day by Michael Hudson (“Why the U.S. Has Launched a New Financial World War — and How the Rest of the World Will Fight Back“), in which he argued that the ongoing currency wars are the fault of the US. Below, I’ll explain why he’s both right and wrong, and why he (and everyone else) should shut up and stop complaining.