SA Rand is now one of the best performing emerging market currencies in 2016

The Rand has strengthened by 8.5% against the US Dollar since the beginning of 2016 (up until 19 April 2016). This makes it one of the best performing emerging market currencies in 2016 (see chart attached). This follows a decline of 25.4% against the Dollar in 2015. Equally the Russian Ruble has risen by 11.6% against the Dollar in 2016, after a decline of 23.5% in 2015, while the Brazilian Real has gained 11.6% against the Dollar after a loss of 32.6% in 2015. In other words, the worst performing emerging market currencies in 2015 are tending to be the best performing currencies in 2016. Even the Argentinian Peso has managed to re-trace some of its lost ground in recent weeks; but is still down year-to-date.

Importantly, this improvement in the performance of emerging market currencies does not reflect an improvement in the economic fundamentals of these countries. Although there have been, perhaps, one or two positive economic developments in some of the emerging economies during the early part of 2016, this is not enough to suggest a massive turnaround in currency performance.

,b>Rather, the strength in many emerging market currencies appear to reflect a combination of factors that have led to an increase in bond and equity portfolio flows from developed markets back into emerging markets (after significant portfolio outflows in 2015). These factors include improved economic data out of China (which has helped to reduce investor concerns about further weakness in emerging markets) coupled with a more dovish tone from the US Federal Reserve as well as the extension of QE in the Euro-area and the ECB’s decision to introduce a negative deposit rate. It also helps that many of the emerging market currencies (including the Rand) have been regarded as being significantly undervalued.

This does not mean that the current reversal of emerging market capital flows will be sustained. Instead, the flows could prove to be extremely sensitive to changes in the growth outlook for developed markets (especially the US, which is facing an especially weak Q1 2016 estimate of GDP) as well as the likelihood that the Federal Reserve will resume the process of normalising short-term interests rates before the end of 2016. Furthermore, a return of growth uncertainty in China could also interrupt emerging market capital flows and undermine the relative strength of these currencies in 2016.

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