Emerging Markets are economies of developing countries that are progressively integrating into world markets. They constitute nations that are likely to become develop in the near future, as well as those that were in the past.
Emerging markets tend to have most (not all) of the characteristics of developed nations. They are essentially “nations on the move,” transitioning from traditional, low-income, less-developed economies to modern, industrialized economies capable of sustaining higher standards of living, as well as mixed/free markets. Emerging markets typically exhibit high growth rates, but this rapid economic growth also carries inherent risks.
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The Risks Range From General Volatility To Sociopolitical Instability.
Nonetheless, emerging markets have played an important role in stimulating the global economy since the term was coined in the early 1980s. In fact, emerging markets are estimated to make up about 80% of the global economy. . This is because large countries like China and India are also called emerging markets due to their over-reliance on exports as well as the availability of cheap labor.
The constitution of emerging markets is highly controversial. There is no general consensus on the absolute metrics that can be used to rank emerging markets. However, there are at least 20 emerging markets in the world; the IMF ranks 23 countries, the MSCI (Morgan Stanley Capital International) ranks 24 countries, and the Dow Jones ranks 22 countries. Metrics used to rank emerging markets include GDP per capita, macroeconomic and political stability, investment regulation, business opportunities, and growth rate.
Characteristics of Emerging Markets
Here are some of the characteristics of emerging market economies:
High Rates of Economic Growth
Emerging markets typically have economic growth of between 6% and 7% per year. It is not uncommon for economies to record even double-digit growth rates. In contrast, developed countries tend to register economic growth rates of less than 3%. This means that emerging market GDP growth rates will consistently outpace those of developed countries.
Immature Capital Markets
Emerging markets often have liquid local equity markets and debt markets. However, unlike developed countries, their capital markets are still immature, so it can be daunting to obtain reliable and relevant information about listed companies. It can also be difficult to sell debt products like bonds .
High Investment Potential
Emerging markets have high investment potential, with particularly attractive opportunities as they transition from closed economies based predominantly on mining and agriculture to more open economies that facilitate international trade. Compared to developed countries, emerging markets offer the potential for higher returns despite the inherent risks.
Instability and Volatility
Emerging markets are characterize by their instability and volatility. These countries are vulnerable to fluctuations in the values of commodities such as oil and food products. As well as major currencies such as the US dollar (USD) and the euro (EUR). At the local level. They also highly affect by changes in inflation levels and interest rates.
Major Emerging Market Currencies
Russian Ruble (RUB)
The RUB is the official currency of the Russian Federation and is the 17th most traded currency on world currency markets as of September 2021. The modern RUB was introduced in 1991 following the collapse of the Soviet Union. The Russian economy is highly dependent on the export of oil and natural gas products , mainly to member countries of the European Union. The RUB is highly volatile and has even earned the title of “the most volatile currency in the world”. The USDRUB pair has fluctuated between 55.00 and 80.00 in recent years, with oil price fluctuations and US sanctions being responsible for its high volatility.
Chinese Renminbi (CNH or CNY)
Often referred to as “yuan”, CNH is the official currency of the People’s Republic of China and is the 8th most traded currency on global forex markets as of September 2021. In terms of nominal GDP, China is the second largest economy in the world, behind only the United States. This makes the economy the most impactful emerging market by far. The USDCNY* pair has traded between 6.0000 and 7.2000 in recent years, with the source of the volatility being Chinese monetary policies as well as the international debt market.
Indian Rupee (INR)
The INR is the official currency of the Republic of India and is the 16th most traded currency in global forex markets as of September 2021. The INR traces its roots back to the 16th century. While the Indian economy It has registered its greatest growth in the 21st century. India is a primarily service-based economy. But also has strong agricultural and export sectors. The USDINR pair has traded between 60.00 and 80.00 in recent years, with the triggers for volatility being central bank interventions and changes in commodity prices.
How to Trade Emerging Market Currencies?
Emerging market currencies have unique characteristics that also carry unique opportunities and risks. Compared to developed market currencies, they are relatively illiquid. Highly volatile and trade in low volumes. They also feature wider spreads.
Here are some of the best strategies to take advantage of the opportunities offered by the price action of emerging market currencies:
Emerging market currencies are sometimes influenced by commodity prices and monetary policies. Prolonged trends in commodity markets combined with continued monetary stance (fundamental analysis) can inspire extended trends in emerging market currencies. When it comes to trend trading, traders identify the prevailing trend and then go long or short depending on whether the market is bullish or bearish.
The instability and volatility inherent in emerging market economies mean that prevailing market patterns can be distort and open up opportunities for monetary investment. Breakouts of support or resistance lines can be a source of lucrative breakout trading opportunities. With this strategy, the challenge is always to filter out the valid and false breakouts in the market.
Range trading can offer many opportunities when trading emerging market currencies. For example, China allows its currency to trade in a 2% moving range from a midpoint it sets daily. This fundamental information offers great opportunities to trade ranges in the market. The strategy would simply be to buy at or near define support levels. And sell at or near define resistance levels.
Carry Trade Operations
Emerging markets tend to have higher interest rates than developed markets. This opens up Carry Trade opportunities where investors can borrow low interest rate currencies to buy high interest rate currencies. With this strategy, it is possible to earn the interest rate differential. In the leveraged forex market. The high interest rate spread between emerging market and develop market currencies can be very attractive.
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