Emerging Market Currencies Undervalued, Goldman’s Fiotakis Says

(Bloomberg) -- Emerging-market currencies are undervalued versus the dollar, euro, and yen because developing countries’ central banks are keeping monetary policy loose even as growth returns, Goldman Sachs Group Inc. said today. “Emerging-market central banks have not been eager to allow rapid foreign currency appreciation,” Themos Fiotakis, a London-based analyst at Goldman wrote in an e-mailed note. “Moreover, the very loose monetary policy has been an extra prohibitive factor for strong emerging markets foreign-exchange outperformance.”

Currencies including the South African rand, the Mexican peso, the Brazilian real, the Indonesian rupiah and Russian ruble have potential to experience gains versus the dollar and the euro once central banks unwind monetary expansion, Fiotakis said, recommending clients go “long” on a basket that includes these currencies versus the euro, yen and dollar. A long position is a bet that a currency will strengthen.

Central banks in developing countries have refrained from tightening monetary policy before the U.S. or Europe on concerns interest rate increases may prompt domestic currency gains as investors take advantage of relatively higher yields, Fiotakis said. The Brazilian economy, South America’s largest, officially emerged from recession in the second quarter. Russia’s economic slump is easing in the second half after a “turnaround” in June and July, the government said Sept. 23. The “robust emerging market growth outlook” has created “high expectations for emerging market currencies,” Fiotakis said. The strong performance of emerging market equities also adds to speculation that the currencies may begin gaining soon, he said.

The MSCI Emerging Markets Index has surged 61 percent this year as government stimulus packages and interest-rate cuts helped revive economies, boosting commodity prices on the prospect of higher demand for raw materials. Oil prices have doubled from their December low, while copper has soared by almost the same degree this year.