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LatAm currencies led emerging market rebound to end 2019

A basket of emerging market currencies hit an 11-month high in December 2019, amid an improvement in domestic political sentiment and global economic data, with Latin American currencies leading the rebound.

The MSCI International Emerging Market Currency Index, which reflects the performance of 26 emerging market currencies relative to the U.S. dollar, gained 2.1% in December 2019, the highest increase since January 2019, when the index rose 2.57%.

Unrest in the prior two months had particularly weighed on Latin American currencies, providing room for recovery at the end of 2019, said Antonio Ferri, portfolio manager for local-currency emerging market debt at NN Investment Partners.

The Chilean peso rose 7.7% as the government moved to calm protests by setting a date for a referendum on a potential constitution revamp. The Brazilian real added 5.2% in December 2019 as the Banco Central do Brasil cut the benchmark rate for the fourth consecutive meeting and increased its GDP growth forecast for 2020. The much-debated pension reform bill passed in October 2019.

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Meanwhile, "somewhat better" economic data from the global manufacturing sector and China benefited EM and Latin American currencies, Ferri said in an email. The Colombian peso (+7.9%), the South African rand (+4.8%) and the Russian ruble (+3.6%) were among the biggest winners in the emerging markets during December 2019.

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For 2019, the Russian ruble was the best performer among emerging market currencies, ending the year with a 12.3% gain versus the U.S. dollar as the threat of U.S. sanctions dialed down and tensions between the two countries did not escalate further, analysts said.

The ruble has strong demand as a carry trade as Russian yields remain attractive for investors despite monetary policy easing from the Central Bank of the Russian Federation in 2019, according to Lee Hardman, currency analyst at MUFG Bank.

Meanwhile, "limited sensitivity" to the U.S.-China trade conflict also supported the ruble, Ferri said.

On the flip side, the Argentine peso was the worst performer during the year, losing more than a third of its value against the dollar. The currency will have little room to recover going forward, due to an "unorthodox economic policy mix" and "sticky inflation," Ferri said.

The Turkish lira lost 11.3%, amid "doubts over the appropriateness of the monetary policy approach" in the country, Hardman said in an interview. The Türkiye Cumhuriyet Merkez Bankası AS has aggressively cut rates since Murat Uysal took the helm of the central bank in July 2019.

"The country spent a great deal of energy and resources in keeping the currency afloat but still has to address many fundamental issues; particularly the high level of public bank lending growth, rising quasi-fiscal spending, and sticky inflation," Ferri added.

The Chilean peso (-7.7%), the Hungarian forint (-5.0%) and the Brazilian real (-3.7%) also ended 2019 in the red.

Going into 2020, the environment for EM currencies is "positive and supportive," and the best-case scenario would be a weak dollar and for U.S. bond yields to remain at current low levels, Hardman said.

In addition, global trade relations, emerging market economic data and the U.S. monetary policy are likely to remain the key drivers of foreign exchange in emerging markets, according to Ferri.