Emerging-Market Winners Diverging More From Losers: Currencies

Emerging-market currencies are diverging by the most in two years as investors increasingly focus on the strength of underlying economies in anticipation of the Federal Reserve paring its unprecedented monetary stimulus.

The five best-performing developing currencies since June gained an average 4.4 percent as of yesterday, led by South Korea’s won and Poland’s zloty, data compiled by Bloomberg show. That compares with a 6.8 percent loss for the worst performers, such as India’s rupee and Indonesia’s rupiah. The gap in performance hasn’t been so wide since 2011.

Investors are favoring South Korea’s record current-account surplus and Poland’s shrinking deficits as speculation increases that the Fed will reduce its $85 billion of monthly bond purchases as soon as December. The policy has had the effect of damping interest rates, spurring investors to seek out those economies with the highest bond yields as long as the Fed continued to print greenbacks.

“There’ll be differentiation across emerging markets,” Claire Dissaux, the London-based managing director of global economics and strategy at Millennium Global Investments, which manages about $12 billion, said in a Nov. 12 interview via e-mail. “Fed tapering matters the most for leveraged emerging markets with balance-of-payment weaknesses.”

Won Gains

The won has gained 6.9 percent since June 30 to 1,067.91 per dollar today, after reaching 1,054.35 Oct. 24, the strongest since August 2011. South Korean officials warned they may act to counter the “herd behavior” of currency speculators. The zloty climbed 6.8 percent and touched a two-year high of 3.0183 per dollar Oct. 22.

At the other end of the market, the rupiah has tumbled 13 percent during the second half of this year, dropping to 11,675 yesterday, close to a 4 1/2-year low of 11,680 reached Sept. 30. Argentina’s peso slipped 9.8 percent since June, while India’s rupee fell 5.7 percent, data compiled by Bloomberg show.

Investors should sell the South African rand and Turkish lira against the Mexican and Philippine pesos, Barclays Plc said on Nov. 5. It recommended buying the zloty, Russian ruble and Malaysian ringgit versus the dollar.

‘Opposing Forces’

“Two opposing forces are shaping prospects for emerging markets: Fed tapering expectations and the strength of the global business cycle,” Guillermo Felices, a strategist at Barclays in London, wrote in a report the next day. In the foreign-exchange market, “the framework remains one of differentiation,” he said.

A government report on Nov. 8 showing U.S. employers added a more-than-forecast 204,000 workers in October is leading investors to bet the Fed may start withdrawing stimulus sooner than forecast. Analysts surveyed by Bloomberg last week predicted the Fed would delay tapering until March.

The prospect of a withdrawal of Fed cash has driven up U.S. government bond yields, with the rate on 10-year Treasuries climbing to a three-week high of 2.79 percent on Nov. 12, from 2.55 percent at the end of last month. The yield fell back to 2.69 percent today after Janet Yellen, in a confirmation hearing to lead the central bank, indicated it’s too early to rein in U.S. stimulus.

When Fed Chairman Ben S. Bernanke first hinted at reining in bond purchases in May, he took investors by surprise and sent emerging-market foreign-exchange rates lower. An index of the 20 most-traded developing-nation currencies tumbled 3.7 percent that month, the most in a year, with the won and rupiah falling in tandem, data compiled by Bloomberg show.


Investors are now being more discriminating. The rand, real, rupee, rupiah and lira will be the losers in this “two-tier” foreign-exchange market, while the zloty, won, Israeli shekel and Mexican peso’s “robust external positions and strong growth prospects” will make them winners, Morgan Stanley said in an Oct. 31 report.

“We see the EM currency market as increasingly bifurcated, with economies with significant external deficits, inflation and concerns over potential growth struggling to attract capital inflows,” James Lord, an emerging-market strategist at Morgan Stanley in London, said in the report.

While the performance of developing currencies will vary, they’ll broadly depreciate against the dollar as exports become less competitive, Viktor Szabo, a money manager in London at Aberdeen Asset Management Ltd., which oversees $10 billion of emerging-market assets, said by e-mail on Nov. 12.

Export Slowdown

Developing-nation exports will grow 3.5 percent this year, the worst performance since an 8 percent contraction in 2009, the International Monetary Fund in Washington estimates. The emerging-market currencies index has fallen 3 percent from a four-month high on Oct. 17 and is down 6.5 percent for the year, data compiled by Bloomberg show.

Foreign funds pulled $264 million from Indonesian stocks this month through Nov. 12, exchange data show.

Global investors poured a record $7.1 billion into South Korean equities in September and $4.7 billion in October, attracted by a current-account surplus that the central bank estimates will reach an all-time high of $63 billion this year.

Poland’s recovering economy is luring investors to the zloty. Gross domestic product grew 0.8 percent in the third quarter, after expanding 0.4 percent in the previous three months, according to the median estimate of 16 analysts surveyed by Bloomberg before a government report due today.

An export-led recovery will also help narrow the eastern European country’s current-account deficit this year to 1.9 percent of GDP, the lowest since 1995, economists in a separate survey predict.

“If concerns about tighter liquidity increase, investors will again avoid risky countries with external imbalances,” Marcelo Assalin, who oversees $3 billion of local-currency emerging-market debt for ING Groep NV in Atlanta, said in a Nov. 7 phone interview. “Surplus countries should outperform. Investors will be looking for that.”

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