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Foreign Exchange

Price convergence between emerging and developed economies points to EM currency gains

Emerging-market consumer price convergence relative to developed-world peers will continue to fuel out performance in emerging-market currencies, say currency managers.

Investors should look to buy emerging-market currencies such as the Czech koruna or Hungarian forint, through either unhedged equities, forwards or non-deliverable forwards (NDFs), said James Wood-Collins, chief executive at Record Currency Management, at a currency investor conference in London yesterday (Thursday).

“Forwards or NDFs are a good option because the cash is held in the developed-currency base, avoiding the risk of exchange controls,” Wood-Collins told delegates at the FX Investment World conference.

Investors taking long positions on emerging market currencies should avoid pooling their short positions in a single developed-world currency, Wood-Collins said. For example, a UK-based investor should not restrict himself or herself to being short the sterling, but should go short using a basket of three or four currencies.

“A ratio of four short currencies to 13 long is about right,” he said.

Another reason to buy emerging-market currencies is the failure of traditional strategies in recent months, conference delegates were told.

“It has been a bad time for momentum strategies in developed markets,” said Igor Yelnik, head of currency and global macro at currency manager IPM. “The signal-to-noise ratio has been very low in developed countries, making trend-investing tougher. In emerging markets the signal-to-noise ratio has been higher.”

Currency manager returns were down 2.9% in May, taking their year-to-date performance to -1.7%, according to research firm BarclayHedge. May’s declines snapped three straight months of gains, including a 2.8% rise in April. Rival index firm Parker BlackTree measured year-to-date performance at -1.4%.

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