MRB's Chart of the Week: Picking the winners of the currency war

Fears of a global currency war have proliferated in the past year, with Japan being the latest country seen as trying to ‘beggar its neighbours’.

These tensions gained momentum in several emerging market (EM) nations last year, as prior currency strength left some countries reeling when global trade hit the skids.

Looking forward, we expect the complaints aimed at countries that have allowed their currencies to weaken to gradually fade, as economic activity revives and global trade strengthens.

MRB’s research has shown the key drivers of relative foreign exchange performance (growth, policy, valuation, capital flows and technical measures) herald a rebound in many EM currencies in 2013. The bar chart summarises the relative attractiveness for the top 19 EM countries, with the top representing the most attractive, and the least attractive at the bottom.

Turkey, Mexico and Russia head the list, offering the potential for capital appreciation and a positive interest rate carry relative to the major exchange rates, including the pound and US dollar. The key catalyst to prod investors into returning to EM currencies will be greater confidence in the global economy, especially the key dynamo, China. Global leading economic indicators turned up last autumn, and the data have recently shown signs of life in a growing number of countries.

At the other end of the relative EM spectrum, the Czech koruna and Hungarian forint are the least attractive. The South African rand also is to be avoided due to trenchant stagflation.

In terms of surprises ahead, the current unattractive backdrop for Taiwan and Korea should reverse once the yen’s sharp slide peters out. The latter should coincide with decisive evidence of better global economic growth and a better domestic Japanese economy.

In sum, global investors should look to EM currencies for the best total returns prospects in 2013, although there will be a wide range of performance within the EM universe.

Mehran Nakhjavani is a partner at global investment analyst the Macro Research Board