Emerging market currencies to watch

What are emerging market currencies?

Emerging market currencies are those used within countries considered to be ‘emerging markets’ (EMs) – a term that has no precise definition but is generally considered to refer to nations that are in a state of transition between ‘developing’ and ‘developed’ status. Such countries have often had several years of robust economic growth, are expected to continue to grow rapidly and may be experiencing a period of political, social and demographic transition, which makes it easier to integrate with other economies globally.

There is no universally agreed list of emerging market currencies, as bodies such as the International Monetary Fund (IMF), FTSE, Goldman Sachs, Morgan Stanley, JPMorgan, Dow Jones, Russell and Columbia University all use slightly different metrics to categorise countries as emerging markets. However, the countries most commonly thought of as emerging include Brazil, Russia, India, China and South Africa – collectively known by the acronym ‘BRICS’. The following are therefore generally considered to be emerging market currencies:

1. Brazilian real (BRL)
2. Russian ruble (RUB)
3. Indian rupee (INR)
4. Chinese renminbi (CNH)
5. South African rand (ZAR)

Here we take a look at each of the BRICS currencies in turn, and highlight the forex pairs you could consider trading if you want to gain exposure to the volatility they can offer.

Brazilian real (BRL)

The Brazilian real is the official currency of Brazil and, according to the most recent BIS foreign exchange turnover report, ranks as the 20^th most traded globally.¹ It was introduced on 1 July 1994 as part of ‘Plano Real’, a plan to stabilise and grow the Brazilian economy and put an end to the country’s hyperinflation after 14 years.

Owing in large part to the commodity boom of the mid-2000s, the Brazilian economy underwent a period of significant growth from 2000 to 2012. However, the combined effects of a slowdown in 2013, falling commodity prices, and a political crisis that saw its president, Dilma Rousseff, impeached for manipulating government accounts, lead to a period of recession. The recession was officially exited in 2017.

Whereas the services sector plays an increasingly significant role in the Brazilian economy, the country exports large amounts of soft commodities, iron ore, agricultural products and manufactured goods – like electronics, aircraft and textiles.

As of June 2021, IMF statistics estimate that Brazil’s nominal gross domestic product (GDP) for 2021 will rise to $1.49 trillion.² They also estimate a purchasing power paritypurchasing power parity (PPP) GDP of $3.33 trillion.

*Please note that the graph shows how many BRL are needed to purchase a single USD. The higher the figure, the weaker the real, and vice-versa.

USD/BRL (US dollar to Brazilian real): 2016 - 2021

Over the past five years, several significant events have taken place – the first of which was the end of the recession in 2017. As shown in the chart above, the real enjoyed a period of relative stability against the dollar throughout the year, even though economic growth was low.

In 2018, Jair Bolsonaro’s presidency was initially well received by markets. A lack of foreign investment, plausibly resulting from subdued economic indicators, saw a strong and rapid depreciation of the real. However, the most outstanding feature in the above graph is the dramatic fall of the real beginning in 2020.

The global economic slowdown caused by Covid-19 saw the USD/BRL move from a low price of 4.01365, on 30 December 2019, to a high of 5.98480 by 14 May 2020. The period since has seen marked volatility – mirroring the continuing negative impact of the pandemic. At the time of writing, the Brazilian economy faces rising inflation, high unemployment, lowered export demand and a continued want of foreign investment.

Market to watch: USD/BRL

Russian ruble (RUB)

The Russian ruble (sometimes spelt ‘rouble’) is the official currency of the Russian Federation and the 17^th most traded globally, accounting for an average daily volume of $72 billion in 2019.¹ While a form of the ruble was first introduced in the 13^th century, the modern ruble was issued by the Bank of Russia in 1991 after the collapse of the Soviet Union. It was redenominated between 1999 and 2001 as a result of rising inflation. The rate chosen was 1 to 1000 – meaning one newly-issued ruble note was equivalent to 1000 of its older counterparts.

Russia’s economy is heavily dependent on the export of commodities, including coal, oil and natural gas. This means that the ruble’s value is often closely correlated with commodity prices. More specifically, about 48% of all Russia’s exports consist of mineral fuels, oils and distillation products – resulting in the currency being frequently tied to global oil prices.

During 2014 and 2015, for instance, Russia went into recession, with the ruble experiencing a corresponding drop in value against the dollar. This happened because global oil prices were tumbling and economic sanctions were imposed against Russia due to its annexation of Crimea and military intervention in Ukraine.

Russia’s economic recovery began slowly (with a growth of about 0.2% in 2016), but reached 2.8% in 2018 and just over 2% in 2019. In 2020, this contracted to -3%. IMF forecasts for 2021 include a GDP growth rate of close on 3.8%.² As of June 2021, IMF statistics estimate that Russia’s nominal GDP will reach $1.71 trillion, and that its PPP GDP will equal $4.32 trillion.

*Please note that the graph shows how many RUB are needed to purchase a single USD. The higher the figure, the weaker the ruble, and vice-versa.

USD/RUB (US dollar to Russian ruble): 2016 – 2021

When exiting the recession, the ruble made ground on the dollar from 2016 into the first quarter of 2017, holding below the ₽60 mark for the majority of the year. Contrary to oil and gas prices, however, 2018 saw a significant weakening of the currency. Urals crude (Russian oil) rose from a level of $63.30 per barrel in February 2018 to $79.30 in October of the same year. This high helped the ruble recover from its low point in September 2018, but even a worldwide spike in natural gas prices towards the end of the year couldn’t move the ruble back below ₽65.

The unprecedented circumstances found in the oil market in early 2020, amid the evaporation of demand during Covid-19 lockdowns, saw the ruble tumble to close on ₽80 to the greenback. Urals crude dropped from $64.50 per barrel in December 2019 to a low of $18.20 in April 2021. Moving forward, the global demand for energy in a world recovering at different rates from the Covid-19 pandemic may prove decisive for the ruble’s stability. At the time of writing, the positive US demand for Russian oil is a good indication that prices, along with the ruble, may strengthen over the coming months.

Markets to watch: USD/RUB and SP_EURRUB

Indian rupee (INR)

The Indian rupee is the official currency of the Republic of India. According to the most recent BIS foreign exchange turnover report, it is the 16^th most traded currency globally, with an average daily volume of $113 billion in 2019.¹ The rupee can be traced back to a silver coin called the rupiya, issued by Sher Shah Suri between 1540 and 1545, with a version of the Indian currency in use ever since. Today, it is issued by the Reserve Bank of India under the RBI Act 1934.

India’s economy is one of the fastest growing in the world, having averaged 7.1% annual GDP growth between 1998 and 2017. It is currently the sixth largest economy, with an estimated nominal GDP for 2021 set at $3.05 trillion.

The rupee has a market-determined (floating) exchange rate – officially. But, the country’s reserve bank actively trades in the USD/INR market to exercise a degree of control over the exchange rate. In practice, this makes the USD/INR a ‘managed float’. As the other rupee exchange rates are not managed, currency arbitrage regularly occurs. However, the intervention is not designed to alter the rate or direction of market movements, but rather to reduce volatility.

*Please note that the graph shows how many INR are needed to purchase a single USD. The higher the figure, the weaker the rupee, and vice-versa.

USD/INR (US dollar to Indian rupee): 2016 - 2021

As can be seen above, the two most significant events in the past five years occurred in 2018 and 2020. The sharp weakening in the rupee in 2018 was brought about by a combination of factors, including a rise in US interest rates (pushing the dollar up), a general lack of appetite for emerging market risk and the significant rise in global oil prices. India is amongst the world’s foremost importers of oil, so any spike in prices only increases its balance of payments deficit.

In 2020, despite the fall in oil prices, demand for the rupee waned as investors – fearing the unknown effects of Covid-19 – opted to hold major currencies (along with other factors). As the oil price picks up, the rupee may weaken if investor appetite for emerging market risk and demand for Indian exports doesn’t keep pace.

Markets to watch: USD/INR and GBP/INR

Chinese renminbi (CNH)

The renminbi is the official currency of the People’s Republic of China and the eighth most traded globally, accounting for average daily volumes of $284 billion in 2019.¹ It is often referred to as the ‘yuan’, a subunit of the renminbi equivalent to one pound or dollar. The currency was first issued by the People’s Bank of China (PBoC) in 1948, approximately one year before the country became the People’s Republic of China.

The country’s GDP grew by an average of 9.1% annually between 1998 and 2017. China is currently the world’s second largest national economy in nominal GDP terms, with an IMF estimation setting it at $16.6 trillion in 2021. However, critics have suggested that this growth has been fueled by the country’s monetary policies, which they claim have kept its currency undervalued against the dollar and other major currencies – making its exports more competitive and enabling it to maintain a trade surplus with other major economies.

The renminbi was pegged against the dollar from 1994 to 2005, meaning its exchange rate was controlled by the PBoC. Research by the European Central Bank (ECB) suggests that a similar peg continued unofficially until at least 2010. While the PBoC now states that the renminbi is allowed to float in response to market dynamics, many analysts believe that China continues to exert significant control over the currency’s valuation.

*Please note that the graph shows how many CNH are needed to purchase a single USD. The higher the figure, the weaker the renminbi, and vice-versa.

USD/CNH (US dollar to Chinese renminbi): 2016 – 2021

Over 2017 and into early 2018, the renminbi strengthened considerably against the dollar; but, the tariff war was certainly felt in the markets and in the Chinese balance of payments current account. Traditionally, China is seen as seen as having an excessively positive trade balance – in 2015, for example, it sat at $304 billion. In 2018, after the tariff war, this dropped to about $25 billion. This saw the renminbi weaken against the dollar from about 6.30 in March 2018 to upwards of 6.95 in October 2018.

Although the currency depreciated in early 2020, unlike all the other emerging market currencies on this list, the renminbi actually appreciated against the dollar over the course of the year. In fact, China’s GDP grew by 2.3% – an extraordinary feat. With low inflation and an IMF-estimated GDP growth rate of 8.4% in 2021, the Chinese economy seems in a good position to recover.

Markets to watch: USD/CNH, CNH/JPY, GBP/CNH and AUD/CNH

South African rand (ZAR)

The rand is the currency of the Republic of South Africa and, according to the latest BIS report, is the 18^th most traded globally.¹ In April 2019, it accounted for average daily volumes of $72 billion. The currency was launched in 1961 – replacing the South African pound – in response to a report by the Decimal Coinage Commission that called for South Africa to move to a decimalised currency system. It is issued by South African Reserve Bank.

South Africa’s IMF-estimated GDP for 2021 is $329.5 billion, making it the world’s 39th largest economy. On account of numerous factors – including political instability, corruption and policy uncertainty – the country has experienced subdued growth over the past years: for example, just 0.79% in 2018, 0.15% in 2019, and a significant contraction of -6.9% in 2020. Other worrying macroeconomic indicators include a very high unemployment rate (29.7%), and a gross government debt to GDP ratio of over 80%. However, the South African Reserve Bank continues to keep inflation within its target range of between 3% and 6%.

*Please note that the graph shows how many ZAR are needed to purchase a single USD. The higher the figure, the weaker the rand, and vice-versa.

USD/ZAR (US dollar to South African rand): 2016 – 2021

The rand has been exposed to many woes in the past few years. After climbing almost 58% over the course of 2015 into early 2016, in November 2017, both Fitch and Standard & Poor’s downgraded local currency debt to sub-investment – or ‘junk’ – status. To add insult to injury, Moody’s eventually followed suit and as recently as November 2020 downgraded SA yet again. The ratings agency cited an abundance of concerns, including a projection that government debt-to-GDP will rise to 110% by the end of the 2024 finacial year (FY). The problematic ‘State Owned Enterprises’ (SOEs) were also seen as a source for further public debt. A stronger renminbi and weakened pound and dollar may offer the rand some support.

Markets to watch: USD/ZAR, GBP/ZAR and EUR/ZAR

How to buy and sell currency pairs

Follow the below steps to buy and sell currency pairs:

1. Decide whether you want to trade forex via CFDs
2. Learn how the forex market works: forex is bought and sold over the counter (OTC) via a network of banks and market makers. Discover more about the forex market in IG Academy
3. Open a trading account: you can apply for a trading account with us in less than 5 minutes, and there’s no obligation to add funds until you want to place a trade
4. Build a trading plan: a trading plan helps take the emotion out of your decision making and provides some structure for when you open and close your positions
5. Choose your forex trading platform: each of our trading platforms, including MetaTrader 4 (MT4), can be customised to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools
6. Open your first position: choose whether you’re going long or short, enter the size of your position and take steps to manage your risk

Learn everything you need to know about buying and selling forex

Remember that there are various factors that affect the price of a currency pair. So, you should always perform technical analysis and fundamental analysis before you decide to trade. Consider political and economic events, and study key price levels to form a basis for your forex positions.

Alternatively, you can gain exposure to emerging market currencies with a tracking index such as the MSCI Emerging Markets Currency Index via an exchange traded fund (ETF). This tracks the values of a basket of emerging market currencies, including those listed above.

Footnotes:
¹Bank for International Settlements: Triennial Central Bank Survey - Foreign exchange turnover, 2019
²International Monetary Fund: World Economic Outlook Database, 2021