Bloomberg News

Frontier Currencies Irresistible as Naira Yields More

March 26, 2012

A money changer trades Colombian pesos and Venezuelan bolivars in Cucuta, Colombia. Colombia saw its peso strengthen more than 10 percent this year. Photographer: Meridith Kohut/Bloomberg

A money changer trades Colombian pesos and Venezuelan bolivars in Cucuta, Colombia. Colombia saw its peso strengthen more than 10 percent this year. Photographer: Meridith Kohut/Bloomberg

Foreign-exchange traders, faced with lower volatility and record-low interest rates in the U.S., Europe, the U.K. and Japan, are searching for returns as far afield as Kazakhstan and Nigeria.

Investec Asset Management Ltd., which trades currencies of nations from Colombia to Uganda, said demand for assets in so- called frontier markets increased in the past six months. The Cambridge Strategy (Asset Management) Ltd. invested in the Nigerian naira from December to February. Money manager Adrian Lee & Partners will add positions in six currencies, including Kazakhstan’s tenge and the Kenyan shilling by the end of the second quarter.

Investors are pouring cash into countries rich in commodities or with high growth rates after Europe’s debt crisis prompted them to seek the safety of the dollar and the yen in 2011. Kenya’s shilling is up 29 percent since October from a record low and Chile’s peso has advanced 6.2 percent against the dollar this year. Now, traders risk central-bank action to counter currency appreciation as nations become overwhelmed by a market that dwarfs their economies.

“We have seen an increase in demand and interest in frontier currencies and emerging market currencies versus the majors,” Thanos Papasavvas, head of currency management in London at Investec, which oversees about $88 billion, said in a March 21 phone interview. “It’s not just a search for yield that has led to the increase in demand for these currencies, it’s also about stronger and improving fundamentals and better valuations.”

Colombian Rally

Investec trades the currencies of Chile, Colombia, Kazakhstan, Kenya, Nigeria, Pakistan, Sri Lanka, Uganda, Ukraine, Vietnam and Zambia, Papasavvas said.

Colombia, where mining helped the economy expand 5.9 percent last year and the benchmark interest rate is 5.25 percent, saw its peso strengthen more than 10 percent this year, tied with Poland’s zloty for the most among more than 170 currencies tracked by Bloomberg.

Its government said last month it will keep at least $1 billion of dividends from state-run oil producer Ecopetrol SA abroad to avoid adding to gains in the peso. It doesn’t rule out further steps to curb currency strength, Finance Minister Juan Carlos Echeverry told reporters in Bogota March 20.

‘Destabilizing’ Flows

Countries from Brazil to Switzerland have already taken steps to weaken exchange rates to protect exports and domestic industry. Brazil, Latin America’s largest economy, has sold dollars and broadened taxes on foreign loans and bonds issued outside the nation as part of measures to shield the real from foreign inflows. The Swiss National Bank introduced a cap of 1.20 francs per euro in September to limit its strength.

“Short-term capital flows can be destabilizing and I wouldn’t be surprised to see more countries fight that,” Dale Thomas, head of currency management in London at Insight Investment Management Ltd., which oversees about $267 billion in assets, said in a telephone interview on March 19. “You can get an asset bubble when money flows in and when money flows out it collapses.”

Investment is being channeled into alternative markets as profits from the largest currencies prove harder to come by. Deutsche Bank AG’s gauge of foreign-exchange returns, which includes the most-actively traded currencies, slipped 0.3 percent this year after a 3.8 percent drop in 2011, the worst performance in two decades. The currency-returns index had climbed 47 percent over seven years ended Dec. 30, 2005.

Falling Volatility

The JPMorgan G7 Volatility Index (JPMVXYG7) has tumbled to 10.14 percent from 15.46 percent in September, reducing money managers’ ability to exploit price moves. The 3.5-cent difference between the euro’s high this month of $1.3357 and its low at $1.3004 is the narrowest trading band since July 2007. The shared currency traded at $1.3228 at 11:59 a.m. in New York today.

Optimism that Europe’s debt crisis is stabilizing after the European Central Bank boosted bank liquidity with about 1 trillion euros ($1.3 trillion) of three-year loans and private investors forgave more than 100 billion euros of Greek debt has boosted demand for higher-yielding assets such as stocks. The Stoxx Europe 600 Index (SXXP) has climbed 8.6 percent this year.

Low rates, austerity and stimulus measures in the U.S., the U.K., Europe and Japan -- known as the G-4 -- have strategists forecasting little change.

The euro will fall to $1.30 by year-end, the median estimate of more than 50 strategists surveyed by Bloomberg shows. The yen will trade at 83 per dollar by year-end from 82.65 today and Britain’s pound will be at $1.57, from $1.5869, separate surveys show.

Emerging-Market Volumes

Futures-trading data from CME Group Inc., the world’s largest futures exchange, shows that volumes in emerging-market currencies jumped 42 percent in 2011 from the prior year, while those in the yen, euro and Swiss franc stagnated.

“There clearly has been more activity in the emerging markets -- there are greater opportunities for investors,” said Ed Baker, executive chairman of London-based The Cambridge Strategy, which specializes in emerging-market currencies and equities and has $850 million under management. “No doubt it has been harder with the G-4 to make money,” he said in a March 20 telephone interview.

Baker said his company has profited in Nigeria’s naira and the United Arab Emirates dirham, while Serbia’s dinar was the best-performing currency in 2011 in its $65 million Apollo strategy fund, which had gross returns of 15.9 percent on an annualized basis since it was set up in May 2009.

Interest Rates

Federal Reserve policy makers have kept their target rate in a range of zero to 0.25 percent since December 2008. The Bank of England’s key rate is at a record low 0.5 percent, Japan’s benchmark is zero to 0.1 percent and European Central Bank President Mario Draghi cut the key rate twice last year, to 1 percent from 1.5 percent.

Nigeria, Africa’s top crude producer, has an interest rate of 12 percent, 48 times that of the U.S. The naira has appreciated 2.9 percent against the dollar this year.

“Part of the reason for the currency strengthening is the foreign flows,” Nigeria’s central bank deputy governor Suleiman Barau said in an interview in London on March 23. “Real return is positive because of the interest rate, and that makes it an attractive place to invest. Those flows are certainly welcome.”

Nigeria’s debt was 17.8 percent of gross domestic product last year, the central bank said in March. 20. That compares with 69.4 percent in the U.S. and 63.1 percent in the U.K., official statistics show. Colombia’s was 45.6 percent.

Riskier Assets

Investors are buying riskier assets as foreign-exchange market volatility ebbs, reducing the risk that price swings will erase profits from trades that exploit differences in interest rates. The JPMorgan Emerging Market Volatility Index (JPMVXYEM) fell to 9.81 percent on March 2, the least since August 2011.

A Citigroup Inc. model portfolio that advises selling G-4 currencies and buying a mix of developed and emerging market currencies including the Australian dollar, the Colombian peso and the Russian ruble, has advanced 4.1 percent, after losing 7.5 percent last year.

“This is a continuation of the trends of the last years, and likely to continue for many years to come,” Greg Anderson, a senior currency strategist at Citigroup in New York, said in a March 22 telephone interview.

Trading Surge

The limited amount of money in such markets may make them more difficult to exit in times of market stress.

Foreign-exchange trading may have risen to a record $5 trillion a day in September, according to the Bank for International Settlements in Basel, Switzerland. Kenya’s gross domestic product was $31 billion in 2010, Colombia’s was $288 billion and the Philippines’ was $200 billion, according to World Bank data.

“Central banks that are recipients of flows, such as the Philippines, need to continue to be mindful of the risk on-risk off mindset of investors,” central bank Governor Amando Tetangco said in a March 22 e-mailed response to questions. “Currency traders are expected to look for short-term returns.”

Kenya’s shilling reached 81.95 on March 14, the strongest in more than a year, after the central bank began raising rates to stabilize the currency. It fell to a record low of 106.75 on Oct. 11, following a surge in inflation. Central bank Governor Njuguna Ndung’u attributed the slide to a variety of reasons, including currency speculation. The benchmark interest rate has risen to a record 18 percent from 11 percent since then.

‘Further Afield’

“People are starving for yield and they are having to go further and further afield to find it,” Dean Popplewell, the chief analyst in Toronto at online currency-trading firm Oanda Corp., said in a March 20 telephone interview. “Africa is probably our top priority. It’s a region we very much want to get into, because there’s big demand for it from our clients, who are looking to trade it more.”

Adrian Lee & Partners, which manages $8.5 billion from London and Dublin, will offer its clients the Kenyan shilling and five other new currencies -- the Egyptian pound, the Kazakh tenge, the Romanian leu, the Tunisian dinar and the Ukrainian hryvnia -- from June, Adrian Lee, president and chief investment officer, said by telephone on March 21.

“After we’ve done six, we’ll try and find another four or five, it’s a gradual process of doing more and more in the currency space,” Lee said. “We see our clients allocating capital to these frontier markets in their portfolios.”

Ghana Rates

Tel Aviv-based ILS Brokers Ltd. offers products based on Egypt’s pound and the naira, broker Eyal Daskal said in a phone interview on March 23. It’s also looking at expanding to Ghana, where the central bank favors pushing up interest rates to lure investors and prevent a currency-market slide.

“In the past, people would only invest in the G-10 currencies, and now investors are moving more and more into currencies like these,” James Kwok, London-based head of currency management at Amundi, the combined investment arm of Credit Agricole SA and Societe Generale SA, which has 658 billion euros under management, said in a March 22 telephone interview. “We will gradually start to invest more and more in these currencies, as their economies grow and they open their capital accounts more.”

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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