Why do hedge funds invest in the national currencies of emerging economies?
11 April 08:22 AM
Over the recent month Western hedge funds have been increasingly interested in the national currencies of the so-called “emerging markets”, which can boast their relatively fast pace of economic growth. The investments promise high returns but are more risky than investments in conventional assets.
So, let’s find out which currencies present interest to foreign investors
Hunting for “emerging” currencies
According to Masterforex-V Academy, the following currencies of the CIS states are currently in great demand: the Kazakhstani Tenge, the Ukrainian Hryvnia and the Russian Ruble.
The major reason for the investment boom is potential profits. Against the background of low-volatility major currency markets, the “emerging” currency markets look far more rewarding to speculators. It is beneficial for the emerging economies themselves as they attract substantial investments, being involved in the global market. However, the risks are considerable.
What other “emerging” currencies are popular with foreign hedge funds?
Apart from the abovementioned currencies, Western hedge funds are actively buying the Chinese Yuan the Mexican Peso, the Brazilian Real, the Indian Rupee, the Kenyan Chilling, the Tunisian Dinar etc.
According to Bloomberg, the trading volume in the markets of the Russian, Mexican and Brazilian currencies more than tripled in 2011 while the major-currency trading volume stayed almost the same.
As we have just mentioned, numerous hedge funds included the national currencies of the emerging economies in their investment portfolios. For example, Investec Asset Management Ltd added the currencies of Ukraine, Kazakhstan, Chile, Nigeria, Colombia, Pakistan and Vietnam . Adrian Lee & Partners ($8B in assets) is planning to invest in the national currencies of Kazakhstan, Ukraine, Egypt, Romania and Kenya.
A couple of day ago Russia successfully placed its bonds to the amount of $7B. The demand was almost 3 times as high the supply! The Demand for 30-year long-term Russian bonds was 4 times as high! You will probably be surprised to know that the biggest share of Russian bonds was purchased by US institutionary investors (they didn’t plan any big-scale purchases this year).
As the result of this investment boom, their national currencies start strengthening, which hinders the countries’ export ambitions, especially when it comes to selling ready-made products, not raw materials.
Central banks’ stance or is it profitable to invest in “emerging” currencies?
Central banks differ in their reaction to the increased interest in their national currencies:
Earlier this year the Brazilian authorities announced their intension to start a “currency war” in order to prevent the Brazilian Real from strengthening. They remember how the national currency appreciated by 33% in 2009. That is why this year the Central Bank of Brazil is determined to implement a series of currency interventions if necessary.
The People’s Bank of China stays in control of the Chinese Yuan strengthening while Washington keeps urging China to accelerate the appreciation. Amid record-high external trade deficit, considerable cuts in foreign investments, lower housing prices and other problems, China seems to be interested in the devaluation of its national currency. If this is the case, it will raise a wave of protests among US, Japanese and European politicians, with unpredictable consequences for the global economy.
The Bank of Russia has officially announced its intension to ease the regulatory control over the Russian Ruble within the next 2 years. From now on, the Russian Ruble exchange rate will be dependant mainly on market conditions. Some analysts expect the Russian currency to strengthen against the US Dollar by 9%.
The National Bank of Belarus is trying to defend against the inflow of speculative capital. For example, it sharply lowered the refinancing interest rate by 5% on March 1st 2012.
The National Bank of Kazakhstan is fighting against the inflow of speculative capital with the help of currency interventions and other means despite an increase in Kazakhstan’s external trade surplus.
The Kazakhstani Tenge. USDKZT is forming an upswing – wave A/B of a bigger-scale wave level, Masterforex-V Academy experts say. A major level of resistance (148.38) is broken. The next major resistance is located at 149,03.
The Chinese Yuan. USDCNY is still flattish. Masterforex-V Academy reports that the currency pair has already broken above the top of the MF sloping channel. However, it is too early to consider a trend reversal. In order to resume the downtrend, USDCNY will have to break below 6,287. A trend reversal will take place only if the price breaks above the MF pivot 6,3151 and makes an upward FZR. A break above 6,346 will suggest the forming of a bigger-scale upswing (wave level Daily or higher).
The Russian Ruble. USDRUR has formed a bullish FZR of wave level H4. The closest level of resistance is the MF pivot 29.75. A mid-term trend reversal can be considered only if the price breaks below the MF pivot and sloping channel.
The Ukrainian Hryvnia. USDUAH is being traded right below the major level of resistance - the MF pivot 8,0546. If the level is broken, the long-term rally will be resumed while a break below 7.9648 will initiate a major downswing – wave C of a big-scale wave level.
What are the near-term prospects?
Masterforex-V academy experts offer 3 scenarios:
The 1st and most probable scenario: As the result of new economic and financial shocks, the major currencies will grow more volatile once again, thus making currency speculators go back to “conventional” trading – trading the US Dollar, the Euro and other major currencies.
The 2nd (pessimistic) scenario implies the collapse of some “emerging” currencies. Without efficient economic stimuli, emerging economies may face multiple “soap bubbles”. Do you remember how numerous Asian currencies collapsed during the Asian financial crisis in the 1990s?
The 3rd (optimistic) scenario: Once the emerging economies succeed in working out and implementing flexible and efficient financial policies, they (the policies) will help to attract foreign investments and to transform them into achievements in the real-sectors of those economies.
Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
How long will foreign investors be showing interest in the currencies of emerging economies?
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