‘Exotic’ Currencies Emerge As Outperformers
Every now and again I look up the world’s best-performing and worst-performing currencies, and the results are always a mixed bag of exotic units, including some I’ve never heard of. Still, it’s an interesting exercise, and it’s worth looking at the results.
The Best Performers…
The Paraguayan guarani is currently up 19.35% against the US dollar in 2008, which, as far as I can see reflects global soybean prices. This relationship is described in more detail in Business Monitor International (BMI)’s most recent guarani forecast back in June. The currency has already breached BMI’s end-2008 target of PYG4,000/US$, and is just narrowly hovering on the strong side of that level. Naturally, a downturn in soy prices poses the main risk for the currency.
Elsewhere, the Moldovan leu and Georgian lari have been notable outperformers. The former has been rising since late 2006, which is surprising, considering that Moldova is considered the poorest country in Europe. I suspect one reason behind the leu’s ascent is high remittances (up 60% y-o-y to US$750mn in the first half of 2008), which are often pivotal for some of the world’s more underdeveloped countries. One of my colleagues is currently on his way to Moldova, and will report back soon. As for the lari, it has surprisingly held steady despite the Russian invasion, which would suggest either a) remarkable investor confidence in it, or b) very heavy management.
Several African currencies are among top performers. The Zambian kwacha has risen mainly on the back of high copper prices (which look likely to fall now), the Algerian dinar from energy exports, and the Malagasy ariary from foreign investment into Madagascar’s mining sector. The only ‘mainstream’ high performer is the Slovak koruna, which has benefited from robust economic growth, high foreign investment, and its ongoing convergence with the euro.
…And The Worst
Unsurprisingly, the Zimbabwe dollar has proved the worst-performer, and little need be said to explain this. Regarding the Turkmenistani manat, the government on May 1 devalued the currency by 56% in order to harmonise a dual exchange rate system inherited from former dictator Saparmurat Niyazov’s era. The new system is designed to reduce risks for foreign investors. As for Iceland’s krona, again no surprises: Iceland is facing a mini-economic crisis, with GDP down 3.7% in Q1 2008, inflation in double-digits, and external debt at 700% of GDP. Pakistan’s rupee, too, is a predictable loser. The trade and current account deficits have surged on high oil prices, inflation has risen to 30-year highs around 25%, and political uncertainty has been and still is a major risk. Elsewhere, the Swaziland lilangeni, Namibian dollar, and Lesotho loti are all pegged to the South African rand, which has itself been under pressure this year, due to the current account deficit, weaker capital inflows, and slowing growth.
Some Key Observations On Obscure Currencies
While it may be tempting for investors to pile into the Paraguayan guarani and Moldovan leu, I suspect that these are not very liquid currencies, and that buying into them is not that easy. However, they are still worth watching, since they serve as bellwethers for economic performance.
One more thing to add: bear in mind that several exotic currencies are pegged at parity to ‘mainstream’ ones. For example, when I first looked at Bhutan’s ngultrum, Nepal’s rupee, and Brunei’s dollar, I noticed quite pronounced patterns not befitting illiquid currencies. Then I realised that the former two units are pegged to India’s rupee and the latter to Singapore’s dollar.
Currency Performance Against US$ (%)