U.S. President-elect Joe Biden’s victory and progress on a COVID-19 vaccine propelled a closely watched index of emerging-market currencies to its best monthly finish in nearly two years.
The MSCI International Emerging Market Currency Index, which measures the performance of 26 emerging-market currencies relative to the U.S. dollar, rose 2.2% in November. That marked the sixth consecutive monthly rise and the largest gain since January 2019, when the index jumped 2.6%.
Twenty of the 21 emerging-market currencies tracked by S&P Global Market Intelligence posted gains in November, with the Colombian peso and Turkish lira outperforming the pack with gains of 7.4% and 7.2%, respectively.
Analysts doubled down on their view that Biden would adopt a trade policy agenda that is less confrontational than President Donald Trump’s approach. “This should increase business confidence in EM via increased policy predictability, which we see boding well for encouraging foreign investment flows,” strategists at TD Securities said in a note.
In addition to Biden’s victory, recent headlines on potential coronavirus vaccines have greatly benefited capital flows to emerging markets, according to the International Institute of Finance. “[A] vaccine is a positive boost to global demand and commodity prices … with the resulting terms of trade shock lifting most emerging market currencies,” the IIF said in a report published Nov. 26.
In November, nonresident portfolio inflows into emerging-market securities jumped to $76.5 billion from $23.5 billion in October, according to IIF estimates. The IIF expects emerging markets to record in the fourth quarter the strongest portfolio inflows since the first quarter of 2013.
“EM currencies are starting to benefit more from inflows into EM markets,” wrote Lee Hardman, currency analyst at MUFG.
Hardman also noted that oil-related currencies led by the Colombian peso bounced back in November alongside oil prices. “Our bullish outlook for the price of oil favors further gains for oil-related currencies,” he said.
The lira was the second-best performing emerging-market currency last month, when Turkey’s central bank finally gave in to calls for tighter monetary policy, raising its main rate by 475 basis points in a move widely seen by analysts as a positive step in restoring credibility.
Over the next few months, emerging-market currencies are expected to appreciate further against the U.S. dollar on the back of the global economic recovery and continued gains for risky assets generally, according to Jonas Goltermann, global markets senior economist at Capital Economics.
“[W]e think that there is ample scope for many EM currencies to rally further over the next year or two,” Goltermann wrote, projecting a pickup in demand for commodities, a key export for many emerging markets.