It’s better late than never for BlackRock, Franklin Templeton and a small cadre of influential money managers that six months ago called for a rally in emerging- market currencies. Now, the rest of Wall Street is starting to believe their strength may last.
An MSCI gauge of developing-nation exchange rates has climbed to the highest in 13 months and is on course for the first annual advance in four years.
Strategists are rushing to raise their forecasts to keep pace with the gains: eight of the 10 currencies to receive the biggest upgrades since the end of the first quarter are from the developing world.
While easy-money central bank policies have pushed yields on more than $10tn of bonds in Europe and Japan below zero for some time, it’s now starting to dampen currency volatility, making higher-yielding assets in emerging markets even more appealing. Capital flows also underscore investors’ confidence in the outlook for developing-nation economies.
“This has become a golden year for emerging markets, and at the moment it looks like it’s still got some way to run,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp in London, who recommends buying the South African rand, this year’s second best-performing currency. “The broad story of the search for yield should still make emerging markets that much more attractive at a time when the developed world seems to be heading for ever-cheaper rates.”
While their forecasts have been rising, strategists’ projections still haven’t caught up with the markets. Current estimates call for every emerging-market currency to decline through year-end.
Analysts have increased their median year-end estimates for the Brazilian real by 27% since March, the biggest revision in the world. They predict the Brazilian currency will end the year at 3.4 per dollar, or 7.5% weaker to close at 3.1454. Forecasts for the Colombian peso have been lifted by about 11% since March to 3,072 per dollar, while the Russian rouble’s projection has been upgraded by 7.5% to 67 per dollar.
The 10% rally in the MSCI Emerging Markets Currency Index from an almost seven-year low in late-January marks a sharp turnaround for developing nations. Back then, the lowest oil price since 2003, China’s economic slowdown and prospects of higher US interest rates all contributed to broad weakness in emerging exchange rates.
During the rout, some investors foresaw the rebound. Research Affiliates, which helps manage Pacific Investment Management Co funds, said in February that developing-nation assets may be the “trade of a decade” after three years of underperformance made their valuations attractive.
The same month, BlackRock, the world’s largest money manager, urged investors to buy emerging-market debt, while Templeton’s star bond manager Michael Hasenstab echoed the bullish view, favouring currencies such as the Mexican peso, Malaysian ringgit and Indonesian rupiah.
The MSCI index has soared since its low point as the Federal Reserve delayed an increase of borrowing costs to support growth, which helped weaken the dollar and boost emerging-market currencies.
Over the past 10 weeks, investors added about $14bn to exchange-traded funds that buy emerging-market stocks and bonds, boosting the inflows this year to a record $15.3bn, according to data compiled by Bloomberg.
Stephen Jen, a former economist at the International Monetary Fund, said he’s giving up his long-held bearish view on developing-nation currencies - for now.
“As long as the developed-market central banks remain dovish, high-yield currencies could continue to perform well,” Jen, now chief executive officer at Eurizon SLJ Capital in London, said in a note to clients on August 5.
“This is a change in my view, and a belated admission that some emerging-market currencies have grossly undershot and the hurdles for them to rally were extremely low.”

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