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Overview of Emerging Market Currencies: Rapid Growth Returns

For a brief period from 5th to 7th December, the value of currencies in many emerging market countries started to grow rapidly, even if in selected markets a weak pessimism has remained in the face of corrections after periods of growth. Emerging market currencies have grown in anticipation that OPEC members and independent oil producers will cut production, while the potential negative impact of expected higher US interest rates seems to have been factored in already.

The clear growth leader over this short period has been the Brazilian real, which rose 4.52% against the dollar in a correction after a recent decline. It seems that the negativity around yet another corruption scandal in the highest echelons of power has subsided for now. The South African rand (+1.83%), Polish zloty (+1.48%), Mexican peso (+1.31%), and Hungarian forint (+1.2%) have also noticeably increased against the dollar. The Kazakhstani tenge and Indian rupee have also grown against the dollar, but by less than half a percent.

However, under trading pressure, both the Turkish lira and Chinese yuan have fallen against the dollar, although by less than one percent. The Russian ruble has fallen against the dollar, but by only 0.14% after a period of rapid growth following higher oil prices and expectations of promising economic statistics for the fourth quarter of the year.

Important Developments

Hungary has published statistics showing that GDP grew at an annual rate of 2.2% in the third quarter, compared to only 2.0% in the second quarter. Recall that GDP growth in the entire EU in the third quarter in annual terms amounted to only 1.9%. These statistics have positively impacted the exchange rate of the forint to the dollar.

In India, the Reserve Bank has kept the cash reserve ratio and reverse repo rate at 4% and 5.75%, respectively. In addition, the country is currently undergoing a monetary reform under which the Reserve Bank has removed 500- and 1000-rupee notes from circulation, due to concerns over counterfeiting, the informal sector, and even the financing of terrorism. Because the reforms have been carried out rather quickly, not all citizens have been able to exchange their old notes for new ones. Increasing the reserve rate in this situation could help to avoid a panic and flight to the dollar. Thus far, the exchange rate of the rupee to the dollar has increased, albeit slowly, as the monetary reform has caused additional anxiety among currency traders.

Forecast

Our forecast for the dollar/ruble remains at 63-64, and for the euro/ruble at 67-69. Our expectations for the tenge to the dollar and euro are at 344-377 and 358-362, respectively.

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