BRICS Currencies Are A Strong Buy!
Just Wednesday I talked about the run up in “safe haven” currencies. In case you missed it, the article discussed the recent uptrend in the Swiss Franc, Japanese Yen, and even Gold. And of course, why it was happening…
Safe haven currencies have been the best performers during the current debt crises in the US and Europe. And they may continue higher, even with a US debt ceiling resolution.
But you may be wondering… ”What about other world currencies? How do they stack up?” That’s a great question. I’ll tell you, but before I do, I want to give you a bit of background.
When you get beyond the major currencies, the ones most traders play are the BRICS.
Now, you’re not alone if you don’t know what BRICS stands for. BRIC is the acronym for the countries Brazil, Russia, India, and China. BRIC was coined by Goldman Sachs Jim O’Neill back in 2001 during a presentation. These countries were originally grouped together as they’re all considered to be in similar stages of advanced economic development.
Ironically, the countries never had a formal connection… that was until they formed their own trade group in 2006. Now they have a mission statement and even hold annual summits!
In their latest attempt to strengthen the organization, they admitted South Africa into the group just this past year. So now they’re known as the BRICS!
Ok, enough with the history lesson… How have their currencies held up during all of the debt crises?
Let’s take a closer look.
BRAZIL: GDP WORLD RANKING – 9TH LARGEST AT $2.2 TRILLION
Brazil’s economy has been red hot for years now. In fact, GDP is growing at a solid 7.5%! The economy’s benefiting from strong exports of autos, transportation equipment, iron ore, soy beans, footwear, and coffee.
As a result, Brazil’s currency, the Real, has strengthened at an amazing rate. Over the past year, the Real is up over 20%! That’s a massive gain for a currency… most currencies are lucky to move two to five percent in a year.
In fact, the central bank just raised the foreign investment tax to further curb the currency’s climb. But I don’t believe that’s going to stop the growth… it hasn’t in the past. With near double digit inflation and raging growth, expect to see the Real continue its monumental climb for quite some time.
RUSSIA: GDP WORLD RANKING – 7TH LARGEST AT $2.23 TRILLION
After struggling through the 2008-09 global recession, Russia is enjoying robust GDP growth of 4%. It’s due primarily to strong energy commodity exports. But Russia exports much more than just oil and natural gas. Other exports include palladium, wood, military equipment, and also planes.
And these strong exports are driving the Russian Ruble to new highs. The currency is now trading 10% higher than it was a year ago…
With the world’s thirst for energy growing at an exponential rate, expect Russia’s rapid economic growth to continue. And look for the Ruble to rise along with it.
INDIA: GDP WORLD RANKING – 5TH LARGEST AT $4.06 TRILLION
While the 5th largest world economy can hardly be called an emerging market, India’s growth rates rival virtually every emerging market on the planet. Since 1997, India has averaged over 7% GDP growth each year.
And currently GDP growth is a staggering 10.4%.
This red hot economy is driven by both domestic demand and exports of products and services. India’s exports include petroleum products, precious stones, machinery, iron ore, steel, chemicals, and apparel. And let’s not forget their massive labor force handling all of Corporate America’s outsourcing needs.
But it’s the currency that’s really smoking hot…
The Indian Rupee has seen an impressive 12.5% rise in value over the past year! Again, currencies don’t normally appreciate that fast. But with double digit inflation to control, India’s central bank can’t help but increase interest rates.
And future rate increases will keep driving the currency’s value higher and higher…
CHINA: GDP WORLD RANKING – 3TH LARGEST AT $10.9 TRILLION
China’s had one of the fastest growing major economies for decades. And according to the most recent GDP release, China is still growing at a mind boggling pace of 9.5%. China is seeing some of the fastest domestic and export growth in the world right now. Exports include electronics, machinery, data processing equipment, apparel, textiles, and optical equipment.
But as far as the currency goes, it’s a different story…
China may indeed have one of the fastest growing economies on the planet, but you wouldn’t know it by looking at their currency… the Renminbi Yuan. You see, for decades the Chinese have kept their currency pegged, or fixed, to the US Dollar.
This strategy allows their export growth to remain very high.
In other words, they simply have a fixed exchange rate. Now supposedly, the Yuan is currently a free trading currency… so says the Chinese government.
Given all of the wild swings in the US Dollar, that’s a pretty tight range for a free floating currency, don’t you think? Clearly, the Chinese are still keeping a very tight leash on the Yuan.
And I don’t see this pattern changing anytime soon. That makes the Yuan a poor choice for short to medium term gains…
SOUTH AFRICA: GDP WORLD RANKING – 25TH LARGEST AT $524 BILLION
The newest member of the BRICS group is the smallest and most underdeveloped country of the bunch. But their huge growth potential is why they’ve been invited to the party. That, and China will be investing over $50 billion into developing the nation’s infrastructure by 2015.
With a more modest 2.5% GDP growth rate, South Africa has yet to tap their enormous potential. Up till now, the country’s poor infrastructure has kept it from being a major player in the commodities market.
But that’s all changing with China’s investments.
You see, some of the richest precious metal deposits lie buried deep in the heart of this African nation. These include gold, diamonds, iron ore, platinum, palladium, and nickel. As China develops South Africa’s infrastructure, we should see big increases in the country’s economic growth rate.
And in the process, the South African Rand will really take off! Even with a lousy infrastructure, the Rand has provided terrific returns.
Over the past year, the currency has jumped by over 15% in value! And with interest rates heading higher to control inflation, the Rand is poised for serious gains.
As you can see, the BRICS currencies have performed well over the past year… except for China’s. And even in the face of the debt crises, most have appreciated!
The BRIC currencies remain a great longer term investment with huge upside potential. And they can provide you with a layer of protection from the US and EU debt crises in the process. Consider adding them to your portfolio today.
Category: Currency Trading
