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EM currency index returns bounce back in October

Emerging market currency indexes bounced back to positive returns in October after a turbulent September, although returns have lagged behind their equity counterparts, according to data from an independent index provider.

The passive, fully funded currency indexes provided to euromoneyfxnews show emerging market currencies produced an average return of 7.13% in October, a big turnaround from the losses experienced during the previous month as investors abandoned higher-yielding currencies in favour of safe havens. The BRIC Index was among the best performers, delivering 6.06% in October, closely followed by the Commodity Currencies Index, which generated 5.83% in returns. An index of the top 10 emerging market currencies by GDP delivered 5.02%, whereas the Central Eastern European and Middle Eastern currency index, among the worst performers for the month, still generated a positive return of 3.55%. By comparison the DXY dollar index, which tracks the dollar’s progress against a basket of six major currencies, lost 3.02% in October.

Turning to equities, the MSCI EM World index, designed to measure equity market performance in the global emerging markets, gained 13.01%. However last month’s gains in EM equities failed to fully recover the losses suffered in August and September as souring risk sentiment, coming from fears in the eurozone, induced sharp sell-offs.

The twice-leveraged currency indexes performed comparably to equities this month; the BRIC Index 2x delivered over 14%, the highest return of any of the indexes, the data shows. The BRICS 2x index, which includes the South African rand, also generated a monthly return of nearly 13%, closely followed by the Commodity Currencies Index 2x, which delivered 12%.

The twice-leveraged BRIC and LatAm indexes have delivered the highest return of any EM currency index and have outperformed benchmark equity indexes by a large margin in 2011. The BRIC 2x and LatAm 2x indexes generated 9.8% and 8.5% year-to-date, compared with the MSCI EM World index shedding 13.6% and the DJIA gaining just 3.3%.

EM currency indexes continue to outperform emerging market equities on a reward-to-volatility basis. The average Sharpe ratio, which measures excess return per unit of deviation, for the EM currency indexes was 1.08, double the average for MSCI EM World, Asia and DJIA equity indexes over the same period.

Currency index returns 
 Source: Independent index provider
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