What Are The Top EM Currencies?
Leverage our insights with our guide to emerging market currencies, also known as EM currencies. Their volatility can offer opportunities but, of course, there are risks involved, as with any form of trading.
Our guide to emerging market currencies: What to expect
What is an emerging market currency?
Emerging market currencies are used in countries where the economy is in a state of development. It can be difficult to attach an exact definition to the term because different bodies use different metrics to determine whether a nation's economy can be classed as fully developed or still in the process. Despite these discrepancies, the local currency of several nations is widely recognized as tied to emerging markets.
What are some examples of emerging market currencies?
When compiling a list of emerging market currencies, BRICS will commonly feature prominently. This stands for:
- Brazilian real (BRL)
- Russian rouble (RUB)
- Indian rupee (INR)
- Chinese renminbi (CNH)
- South African rand (ZAR)
BRL
The real has been the official currency of Brazil since 1994, when it was launched to replace the cruzeiro real. It was initially pegged to the US dollar but has floated freely on the market since 1999 and its performance can be impacted by commodity prices. It was these prices that helped to fuel the growth of the Brazilian economy in the first decade of the 21st century, thanks to significant exports such as iron ore and agricultural produce.
RUB
The rouble is thought to be one of the oldest currencies still being used, alongside the British pound. Fresh banknotes and coins were introduced following the dissolution of the Soviet Union, and the rouble in its current guise is a redenomination of the previous Russian rouble, which in turn had replaced the old Soviet rouble. As with Brazil, Russia's economy is heavily commodity-based, so coal, gas and oil prices can all affect its performance.
INR
The history of the rupee dates back all the way to the 16th century and the Indian economy has shown GDP growth in all but one year since the start of the 1980s. The exception was in 2020, when the outbreak of coronavirus contributed to a 5.8% decline. The Reserve Bank of India helps to manage the rupee's rate by trading USD/INR, although it is not pegged to the dollar.
CNH
Although classed as an emerging market currency, the renminbi is the fifth-most-traded in the world, featuring in 7% of all forex trades according to data from the Bank for International Settlements. The abbreviation CNH is used to describe renminbi when traded offshore, and CNY for when it's traded in mainland China.
ZAR
The rand has been in circulation since 1961, replacing the South Africa pound when the country left the Commonwealth and became a republic. It has previously been pegged to the US dollar although it floats freely now and, like some of the other EM currencies mentioned here, its performance is heavily influenced by commodity prices – most notably platinum, gold and iron ore.
Other EM currencies
As well as BRICS, a list of emerging market currencies may feature the likes of:
- Singapore dollar (SGD)
- South Korean won (KRW)
- Polish zloty (PLN)
SGD
The Singapore dollar features in the top 10 most frequently traded currencies, with an average daily turnover amounting to US$183 billion as of 2022. Launched in 1967 after the nation gained independence from Malaysia, it was first pegged to the British pound. It has floated freely since 1985 and the Singapore Department of Statistics can be a useful resource to track the performance of the national economy.
KRW
The won replaced the yen in 1945, at the end of World War Two when Korea was divided into North and South. It was initially pegged to the USD, before being replaced by the hwan but by the 1960s it had been reintroduced and in 1975 it stood as the sole legal tender. South Korea and China share a prolific trading relationship, so the performance of the CNH can have a bearing on the KRW.
PLN
Although Poland is preparing to adopt the euro, a date has not yet been specified and it continues to use the zloty. Its average daily trading turnover is small at $54 billion, and its value can be influenced by political events that impact its neighbours – such as Ukraine.
What factors can impact emerging currencies?
Emerging market currencies are susceptible to a wide range of external factors that can influence their performance. It's important to understand what these are so that you can feed them into your fundamental analysis and help you make your decisions. For example:
- Central banks: These are responsible for setting interest rates and the monetary policy for their respective nations. Their announcements – whether scheduled or ad hoc – can play a pivotal role in the sentiment around the currency.
- Political developments: Elections, trade agreements and conflicts – such as that between Russia and Ukraine – can have an impact on emerging market currencies of the countries involved as well as those around them.
- Economic data: Metrics like economic growth, employment rates, and inflation gauge a nation’s economic health, influencing its currency’s performance.
- Imports and exports: Some emerging market currencies are dependent on the performance of the sectors that support their economy. For example, Poland's primary exports are motor vehicles and their accessories, so any major developments in that niche can impact the zloty.
- Major events: The coronavirus pandemic is one such example of an event that had a significant impact on the global economy. Natural disasters such as storms or earthquakes can also affect some EM currencies.
Are emerging market currencies right for me?
As a trader, you need to build a strong understanding of emerging market currencies before entering any positions. Economic data: The likes of GDP, employment rates and inflation can all be used to measure the relative strength or weakness of a nation's economy and, by extension, its currency.Decisions not backed up by extensive analysis could increase your chances of making a loss, so you need to appreciate the potential risks and benefits of trading emerging market currencies.
The pros of trading EM currencies
- Volatility: Emerging market currencies tend to offer greater volatility than majors like the USD, EUR or GBP. These more significant movements can offer opportunities to make larger profits from the same size trade, if the performance tracks in the way in which you expect.
- Leverage: You can trade EM currencies using leverage, which means you can increase your market exposure for a fraction of the capital. If the trade works in your favour, this could have the effect of amplifying your profits.
- Trade both ways: Trading via derivatives enables you to speculate on the performance of an asset without having to take physical ownership. This allows you to go long or short and profit from bearish as well as bullish markets.
The cons of trading EM currencies
- Volatility: While it offers potential benefits, the volatile nature of emerging market currencies can pose a risk, too. If a sudden shift in the market goes against you, you could stand to make a significant loss.
- Leverage: This can also work both ways. When trading on margin you are exposed for the full value of your position, not just your deposit. If the market moves against you, your losses could be magnified.
- Illiquidity: Emerging market currencies are traded at lower volumes compared to major currencies like USD, EUR, and GBP. That relative lack of liquidity could mean that you can't always enter or exit positions at the prices you'd like.
Strategies for trading emerging market currencies
Your approach for trading emerging market currency pairs will depend on your goals, the time and financial resources available to you, and your level of understanding. We've outlined a few common strategies below.
- Day trading: Opening and closing positions within the same day in a bid to capitalise on incremental price movements.
- Trend trading: Identifying a pattern of movement in the market and opening positions with the expectation that it will continue in the same direction.
- Swing trading: Entering a position at a point where you believe the prevailing trend is set to reverse its direction.
- Range trading: Identifying the upper and lower limits at which an emerging market currency pair typically trades, and taking up positions within those resistance and support levels.
- Breakout trading: Recognising where a pair's price is set to break out of those resistance and support levels, and entering a position accordingly.
Trade EM currencies with Tradu
You can add emerging market currency pairs to your portfolio with Tradu. Sign up for a live trading account, it takes a matter of minutes.
Please note that when trading forex with Tradu there is no physical delivery of any currency.