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Investors who had moved from developed countries to emerging markets in search of yield got an ugly surprise last month, after sharp declines in exchange rates cut deeply into returns. A close look at the recent performance of the main free-floating emerging-market currencies (ie. not China's, whiose value closely follows the U.S. dollar) highlights one exchange rate where Canadians should pay attention: the South Korean won.
Developing world currencies are rising Monday but they have a long way to go to make up for the damage caused in May. The rising U.S. dollar caused an almost seven per cent decline in the iShares JP Morgan Emerging Markets Bond ETF (U.S.), one of the largest in the sector.
For individual countries the biggest losers were the Brazilian real (-6 per cent), the Mexican peso (-5.2 per cent) and the Russian ruble (-5.2 per cent). (See chart.)
The decline in the South Korean won was smaller at 2.4 per cent, but more interesting for Canadian investors. Because South Korea is a central Asian trading hub and an integral part of the global manufacturing supply chain, South Korean assets have often provided a leading indicator for Canadian assets and the Canadian dollar. In May, it was the emerging markets currency with the closest correlation to the loonie.
The sell-off in developing world currencies was part of a violent global market reaction to the spike in U.S. interest rates. The hope is that Treasury markets will stabilize and offer rate-sensitive assets, including emerging market currencies, a chance to recover lost ground. For Canadians, the won is among the best indicators to watch.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .
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Scott Barlow