Emerging Markets Recovering – In the Eyes of the FX Markets

  • 28 Jul 2016
  • By Bluford Putnam
  • Topics: FX

Currency markets are excellent barometers of relative economic health.  This spring, they started signaling some changes in sentiment, showing more favorable outlooks for Russia and Brazil, while maintaining modest concern for China.

Our story starts in May 2013, when emerging market currencies generally began to decline when then Federal Reserve Chair Ben Bernanke started his “Taper Talk” about ending Quantitative Easing.  The downtrend ended in early February 2016.

Two things changed to end the slide in emerging market currencies.

  1. Oil hit bottom (spot West Texas Intermediate crude oil at around $26 per barrel) and bounced upward (touching $50 by May).  
  2. U.S. fixed income markets woke up and realized that the Fed might well be on a one-and-done path after its rate increase in December 2015, and that the guidance given at the time -- of four more rate increases in 2016 -- was just not going to happen.  

For the turning point on our charts, we have marked 11 February, 2016, as from then on many emerging market currencies started a strong rally.  We do note that some currencies had been moving upward since September 2015, but not with much enthusiasm.  In 2016, among emerging market currencies, it has been the case that the biggest losers of the recent past became the biggest winners.

The Russian ruble responded strongly to the rebound in oil prices.  Moreover, as political risk rises in the U.S., U.K., and Europe, markets have observed that Russian President Vladimir Putin has now logged 17 years in power.

The Brazilian real also responded to improved political risk.  The impeachment of President Dilma Rousseff led to a new government, a change of management at state-controlled oil producer Petrobras, and a general sense that the worst was over for the economy.  To be sure, the economy is still in recession, government debt burdens are huge, and the new government faces tremendous challenges.  Still, with 14% interest rates (they may come down later in 2016 and 2017 as inflation declines), the Brazilian real offers a very nice premium to many other emerging market currencies, such as the Mexican peso (4%), and this partly explains why the Mexican currency has not done as well during the emerging market currency rebound as others.

The Chinese yuan is a noticeable outlier.  The Chinese currency is weakening.  This process started in 2014, and it represents a necessary adjustment to the lack of export growth in China in the face of a slow-growing world.

In the past twelve months, China has provided large quantities of new loans as part of a domestic stimulus program.  The impact has been to slow the pace of economic deceleration while pushing the Chinese yuan into weaker territory.  While the stimulus may not be as aggressive over the remainder of 2016, the favored scenario is for further (managed) weakness in the currency as the country moves from a 6.5%-to-7.0% real GDP growth economy to a 3%-to-5% growth economy over the next few years.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Bluford “Blu” Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. With more than 35 years of experience in the financial services industry and concentrations in central banking, investment research, and portfolio management, Blu serves as CME Group’s spokesperson on global economic conditions.

View more reports from Blu Putnam, Managing Director and Chief Economist of CME Group.

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