EM Fund Managers shift to high yielding exotic currencies

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16 November 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The once traditionally safe-haven US Dollar has suffered from a fairly disastrous 2017 so far, sinking to a twenty month low on a trade-weighted basis in September. The currency lost over 10% of its value in the first nine months of the year alone as investors dialled back expectations for Federal Reserve interest rate hikes and grew doubtful that President Donald Trump would be able to force through any form of fiscal stimulus in the US this year.

n the midst of a weaker Dollar, many of this year’s best performing fund managers have begun restructuring their currency portfolios away from the traditionally safer major currencies such as the USD, and in favour of more exotic currencies.

The Dollar’s fairly abrupt depreciation in the past few months has forced investors to embrace the more volatile, riskier emerging markets, of which offer considerably higher yields. As a result, there has been a fairly sizable increase in demand for exotic currencies this year, many of which are generally not as easily accessible or liquid.

Currency exposure to the likes of the Czech Koruna (CZK) has more than doubled since the final quarter of 2016, while exposure to the Uruguayan Peso (UYU), for example, quadrupled in the three months to June from the quarter previous.

Private equity inflows into emerging markets are now at their highest level since comparable records began in 2008. The MSCI Emerging Market Index has risen by over 30% since the start of the year, far outpacing growth of both the S&P 500 and Dow Jones index (Figure 1), while the iShares Emerging Market bond index has also been on a steady upward trend since the start of last year (Figure 2).

Figure 1: MSCI EM Index vs. S&P 500 & Dow Jones Index (Jan ’17 – Oct ’17)

Figure 2: iShares Emerging Markets High Yield Bond Index (2016 – 2017), Ebury provides highly competitive pricing and unrivalled access to liquidity in these exotic currencies due to the volume of currencies we trade, as well as our relationships with market makers and regional banks.

Additionally, we provide businesses that want to trade and transact internationally with the tools they need to manage their international trade and support their growth, including import lending, currency and risk products, and payment and collection facilities.

To learn more about our capabilities, contact our specialists or visit our website.