What Is An Emerging Market Currency?
An emerging market currency (EM) is the money of a country that is in the process of economic advancement. National economies that are considered to be emerging markets typically experience an extended period of robust growth in the industrial production sector in addition to the expansion of their economy as a whole. This growth in output acts as a catalyst towards the development of infrastructure and technology. As a result, substantial levels of foreign capital investment are often attracted.
Emerging market currencies are popular targets among many FX investors. In fact, news outlets such as Bloomberg often put out forecasts for EM currencies. Market participants use the forecasts as ways of identifying EM FX products that offer strategic advantages.
Although a concrete definition of an emerging market remains largely debatable, four nations are widely considered world leaders in the category. Known by the acronym BRIC, they are as follows: Brazil, Russia, India and China. Other emerging market economies such as Turkey, Mexico and South Africa are popular destinations from EM FX offerings. For instance, the South African rand (ZAR) is a sought after EM product due to its volatility and correlation to gold bullion.
Each country of BRIC—or BRICS if including the addition of South Africa in 2011—has experienced explosive growth in its gross domestic product (GDP) along with periods of uncertainty created by debt concerns and political unrest. However, in the face of many unique challenges, they remain among the world leaders in GDP as measured with regards to purchasing power parity (PPP).
As of year-end 2020, the countries of BRICS have the following global rank in GDP PPP:
- Brazil: 8th (US$3.15 trillion)
- Russia: 6th (US$4.13 trillion)
- India: 3rd (US$8.90 trillion)
- China: 1st (US$24.27 trillion)
- South Africa: 32nd (US$717 billion) 
While metrics such as GDP are useful in measuring the industrial capabilities of a nation, the value of the domestic currency is also a key indicator of economic health. In the case of emerging countries, the value of money is determined through comparison to the major currencies of the globe. The United States dollar (USD), euro (EUR), Japanese yen (JPY) and Great Britain pound (GBP) are common benchmarks by which an emerging market currency is measured.
Trading Emerging Market Currencies
Emerging market currencies often appear attractive to traders and investors because they typically exhibit increased volatility and dramatic exchange rate fluctuation. The changes in pricing provide opportunity to market participants engaged in the active trade of these products.
While a country may have an impressive GDP and potential for sustainable growth, persistent instability of its domestic currency remains very possible. Developing nations are particularly susceptible to the following factors altering perception towards their economic strength and the value of their national currency:
From elections to revolutions, these create uncertainty in the areas of free markets and trade. Amid these factors, the local currency is poised to experience severe volatility.
Global Debt Markets
A tightening in the global debt market decreases the availability of working capital to developing economies. Without adequate financial input, economic growth in these regions is likely to slow. One of the leading barometers of EM economic performance is the MSCI Emerging Markets Index. The MSCI EM index illustrates the relationship between debt and economic growth in developing economies.
Changes in the monetary policy of developed countries can cause a ripple effect in the foreign currency markets. For instance, if the interest rate on a major global currency is raised, emerging market currencies are likely to experience increased short-term volatility.
A downturn in the pricing of commodities such as crude oil, natural gas, foodstuffs and precious metals may serve as a precursor to a widespread stagnation of economic growth. As an example, the 2020 crude oil selloff stemming from the COVID-19 pandemic had a negative impact on many oil-dependent EM currencies.
The Importance Of Current Events
It's important for an individual involved in the trade of emerging market currencies to stay abreast of economic data releases, global commodity markets and pending shifts in the monetary policy of economic superpowers. A surprising data release can bolster exchange rate volatilities and magnify risk unexpectedly.
A prime example of this phenomenon was the onset of the 2022 Russia/Ukraine war. During the period, economic and financial sanctions set off a massive devaluation of the Russian ruble. The swift and immediate nature of the correction reflected rapidly evolving fundamentals and limited market liquidity.
Top 5 Emerging Market Currencies
Let's not take a look at the top emerging market currencies in the world.
Brazilian Real (BRL)
The BRL is the 19th most frequently traded currency in terms of daily forex market turnover, with an estimated value of US$51 billion. Among the national currencies of the countries included in BRIC, the Brazilian real is behind the Chinese yuan, Russian ruble and Indian rupee in terms of forex volume. The most frequently traded currency pairs on the forex including the real are EUR/BRL and BRL/USD. As of this writing (March 2022), 5.05 BRL = 1 USD.
Brazil's rise to global economic prominence is largely due to a strong exports sector. Earning a global rank of 25th, and valued at US$190.1 billion annually, the country relies heavily upon key exports of iron ore, soybeans, coffee and automobiles. Its leading trade partners are China, the United States and Argentina. From 2013 to 2016, Brazil boasted a 22.3% growth in GDP gaining a place among the world's fastest growing economies.
For the year 2016, USD/BRL traded from a high of over 4.0 in the first quarter, to a low of 3.1 by August. A national debt crisis, depressed pricing of soybeans and coffee, and political change created an atmosphere of uncertainty for Latin America's largest economy. The result was nearly a 25% depreciation of the BRL, attributable to concerns over the Brazilian economy being able to meet growth expectations.
Russian Ruble (RUB)
The ruble is one of the leading emerging market currencies in the world. Tied with the Indian rupee as the 18th most frequently traded currency on the forex market, the ruble has an average daily turnover measured at US$58 billion. Within the context of BRIC, the ruble sits second behind the Chinese yuan in terms of forex market turnover. Key currency pairings including the Russian ruble are USD/RUB and EUR/RUB. As of this writing (March 2022), 130 RUB = 1 USD.
Russia has undergone an economic metamorphosis since the collapse of the Soviet Union. Free-market principles now take the place of a government-planned economy, with prosperity and industrial output becoming more prevalent. Russia is the 15th largest international exporter, eclipsing US$341 billion annually. Russia relies heavily upon the export of petroleum products and natural gas to trade partners in the European Union (EU), China and Japan. For the period of 2013 to 2016, Russian GDP grew 26.6%, enabling the country to become one of the world's key emerging markets.
The ruble is known for its unpredictable nature, earning it the title of world's most volatile currency. The ruble's correlation to crude oil prices coupled with the impact of economic sanctions imposed by the U.S. and EU often lead to dramatic swings in value. During 2015's global selloff of WTI Crude Oil futures, the RUB depreciated 42% against the USD from August to December of that year. This example of rapid devaluation should serve as a warning to individuals interested in engaging the ruble, and encourage a thorough study of the currency before deeming it a candidate for trade.
Indian Rupee (INR)
The rupee is tied with the Russian ruble as the 18th most frequently traded currency in terms of forex turnover, valued at US$58 billion daily. As with the ruble, the rupee lags behind only the Chinese yuan in the forex market turnover of BRIC nations.
As in the case of many other emerging market currencies, the main forex pairing traded for the rupee is with the United States dollar (USD/INR). With respect to the USD/INR, market drivers such as Fed policy and interest rate hikes are vital concerns for any rupee strategist. In addition, any macroeconomic slowdown in the US or India can drive volatility to this pair.
The government of India practices a "managed" float policy, meaning the rupee's value is not purely determined by the open market. In cases of extreme volatility, India's central bank will intervene on behalf of the rupee to preserve its valuation. As of this writing (March 2022), 77 INR = 1 USD.
In contrast to other emerging markets, India operates as a service-based economy. Services account for 45% of India's GDP, and jobs related to the service sector account for 31% of the workforce. Other important parts of India's economy are the agricultural sector and the exportation of petroleum products. India's largest trading partners are the United States, United Arab Emirates, Hong Kong and Saudi Arabia.
The commitment by the Indian government to a monetary policy based upon the rupee's managed float against the USD has been an active mitigator of exchange rate volatility. However, this policy has made the INR and the Reserve Bank of India (RBI) sensitive to U.S. monetary policy. Any move by the United States Federal Reserve to raise or lower interest rates on the US dollar spur an active debate on the pricing of USD/INR and serve as a key element in the INR's valuation.
Chinese Yuan (CNY)
The Chinese yuan is the eighth most frequently traded currency in the world, boasting an average daily forex turnover of US$202 billion. The yuan is involved in 4% of total daily forex volume and is a staple of FX markets in Asia. The yuan is a rare emerging market currency in that it plays a substantial role in the foreign exchange market as a whole. Easily the currency leader of the BRIC nations, traded volumes of the CNY approaches levels of the Swiss franc (CHF), and is not far behind the other seven major global currencies. The most well-known currency pairing including the yuan is USD/CNY, and as of this writing (March 2022) the exchange rate is 6.3 CNY to 1 USD.
Much like the transition of Russia from a government controlled economy to one resembling a true open market, China has made strides towards the integration of free-market principles into its economic philosophy. China employs the world's largest workforce and is the second-largest exporter of machinery valued at US$2.143 trillion annually. The United States, Japan, South Korea and numerous EU countries are China's most substantial trading partners. The nation sustained growth of 45.9% in GDP from 2013 to 2016, making it by far the most impactful emerging market on the planet.
Key drivers of volatility facing the yuan are changes in the international debt market and in the evolving monetary policies of the country's primary trading partners. The Chinese government employs a system of managed float upon the yuan to ensure that pricing fluctuations of the currency can be relatively limited. The People's Bank of China (PBOC) permits the yuan to trade openly within a moving range of 2%, which is based upon the value of the currency against a weighted basket of international currencies. The US dollar accounts for a 25% share of the weighted basket, making any changes to the value of the US dollar of paramount importance to the yuan.
A prime example of this relationship became apparent in the aftermath of the UK's Brexit vote in June 2016. As the US dollar appreciated against other major currencies such as the euro and the British pound, the yuan dropped dramatically in relation to the US dollar. In the days after the Brexit vote, the yuan traded against the US dollar at six-year lows.
Essentially, as international politics saw an unexpected change, the future monetary and debt management policies of trade partners came into question. As a result, currency investors decided on a traditionally safe currency in lieu of one with future promise.
Active trading of emerging market currencies on the forex offers individuals the ability to profit from increased volatility and uncertainty facing developing countries. From the Mexican peso to South African rand, the enhanced EM FX price action creates significant opportunities.
However, risk in such markets can be great, and numerous external factors can contribute to wild swings in exchange rate pricing. The value of commodities, political change, debt concerns and international monetary policy must be taken into account before engaging these products.
Although the possibility of realising considerable profits does exist, the chance of rapid capital loss is also very real. It is up to each trader to decide whether or not pursuit of financial gain in this arena is a suitable endeavour.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.
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