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Is the EM currency sell-off nearing its end?
by Sarah Miloudi on Aug 22, 2013 at 10:37
'Investors in sovereign debt can add value from the currencies and bonds of 70 disparate countries, also adding value from duration, inflation-indexed and dollar debt as well,' King argued, pointing out that investors can also exploit the differences between emerging markets, and warning this clutch of countries should never be lumped together.
Moreover, while currency weakness does pose a threat - namely in the form of higher inflation, higher rates and lower growth - EM governments have acted to overcome these obstacles.
King said. 'A replay of the 1990s crisis looks extremely unlikely, but the pain may not be over yet.'
Focusing solely on currencies, Capital's Shearing said it would be 'dangerous' to put a firm timescale on the end of the sell-off given currency movements are notoriously difficult to predict.
However he said from an economic perspective, some hurdles have been cleared.
'It seems in several countries the bulk of adjustment in currencies that was needed to restore external competitiveness may now have taken place. In Brazil and South Africa, where competitiveness concerns have been greatest, real exchange rates have now fallen by 20%-25% in the past two years,' Shearing explained.
Currencies to buy and sell
In terms of currency investing, King said some now looked undervalued, though urged that Brazil and China's currencies sat at the opposite end of the spectrum.
JP Morgan Private Bank's global currency strategist Sara Yates, meanwhile, pointed to the recent reforms announced for Mexico's energy sector as a possible source of upside.
Although president Enrique Pena Nieto's plans to open up the industry saw the peso underperform, Yates said this was probably due to the change being expected, and also watered down in the eyes of some analysts.
This does not have to be negative for the currency, though, and in a note to clients the strategist Yates urged a 'muted' revamp of Mexico's energy sector could be good news for the peso.
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