Vivek Mishra and Vuyani Ndaba
BANGALORE/JOHANNESBURG (Reuters) – Emerging market currencies are unlikely to recover significantly against the dollar in the next six months unless the U.S. Federal Reserve is in a hurry to cut interest rates, according to a Reuters poll of currency strategists.
Emerging market (EM) currencies have largely underperformed the dollar this year as traders cut bets on whether the Federal Reserve will begin easing monetary policy until June from March amid a stronger-than-expected US economy.
A Reuters poll of currency strategists conducted March 1-6 found that the ten emerging market currencies surveyed were forecast to weaken or, at best, rise only marginally over the next three to six months.
The Indian rupee, Thai baht and South African rand were expected to rise by 0.5-3.0% over the next six months, while the Russian ruble was forecast to weaken by 3-7%.
This means that most of them will not be able to recover the losses of last year and so far this year.
When asked when emerging market currencies could begin a significant recovery, more than 60% of analysts, 41 out of 63, said six months or later. Another 21 said three to six months, and only one said less than three months.
“History won’t change much. This is still a worrying prospect, not very good and not very bad,” said Phoenix Kalen, global head of EV research at Societe Generale (OTC:).
“Lower US Treasury yields are no longer leading EMFX to outperform. Markets are now prioritizing relative growth over relative rates, Fed rate cuts are already warranted, and the implications of US exceptionalism for DXY will weigh on EMFX’s outlook.”
DXY, against a basket of currencies, is up 2.3% this year. A broader currency survey showed the dollar will remain strong in the near future. [EUR/POLL]
“As long as the Fed remains inactive and until the evidence … satisfies both the Fed and the market that they can move forward with an easing cycle, emerging market currencies are likely to remain under pressure overall,” said Jonathan Petersen, senior markets analyst. economist at Capital Economics.
Emerging market currencies could also face turbulence in the coming months as elections in many countries approach, in addition to the US presidential election in November.
“The bigger impact will be the likelihood of increased volatility in EMFX in the second half of this year on the back of events such as the Mexican election, the South African election and then the anticipation of the US election, and what may happen as a result of various political changes. ” said SocGen’s Kalen.
The Mexican peso is likely to depreciate moderately in the near term as the campaign for the June presidential election heats up while the central bank continues to consider the right time to launch a rate easing cycle.
Mike Keenan, Absa strategist, said significant local risks were already baked into the South African rand, which has already fallen 3% this year.
“Hence, once the uncertainty around the elections subsides and electricity (shortages) and logistics problems become less acute, the rand has the opportunity to recover in the second half of the year.”
(As for other stories from the March Reuters currency survey:)