JOHANNESBURG/BENGALURU: Most emerging-market currencies, which recently had a rough ride because of the dollar’s strength, will heal from those losses this year as global demand for risk and high yields grows amid optimism around vaccine rollouts, a Reuters poll predicted.
A steep selloff in the dollar, which posted its largest annual loss since 2017 last year, helped an index of emerging-market currencies, heavily weighted toward China given the size of its economy, gain over 11% since March’s three-year low.
That trend is set to continue over the coming year despite recent hiccups.
A majority of FX strategists in the Feb. 1-4 Reuters poll said the dollar’s strength would be short-lived and stuck to their previous view that the greenback would weaken against emerging-market currencies.
“EMFX weakened by 1% over the past month, as money managers reduced risk across EM. In the medium term, we think the USD weakness story remains, although the interim may be choppy,” said Dirk Willer, head of emerging-market strategy at Citi.
“Looking forward, our bottoms-up forecasts point to stronger EMFX over the next three months, and continued strengthening in 12 months’ time.”
The high-yielding South African rand, which has recovered close to pre-COVID-19 levels, was expected to trade around the current rate in coming months.
Barclays said the new Johnson and Johnson vaccine, if approved for usage, should support EMEA economies like South Africa even though the new virus mutation tempers efficacy.
The Russian rouble was expected to gain about 6.0% to 71.0 per dollar by this time next year despite concern over possible western sanctions.
In 12 months, the Brazilian real was forecast at 4.98 per US dollar, 8% stronger than its value on Thursday but 2.6% weaker than the one-year forecast in January, reflecting persistent uncertainty about the longer term.
The Turkish lira has surged more than 4% and outperformed most of its EM peers this year after the central bank on Jan. 21 vowed to maintain tight monetary conditions until inflation is brought in line, despite President Tayyip Erdogan’s dovish stance.
The lira is set to fall over 10% to 7.89 to the dollar in the next 12 months.
“Real rates are supporting the lira, but this is likely to fade by 2Q21. We expect real rates to fall sharply in 2Q21 and reach zero by 3Q21, reducing currency support outright and relative to high-yielding peers with higher real rates,” said Saad Siddiqui, a strategist at JPMorgan.
Asia, where the economic recovery has been strong, has caught an added boost from China’s yuan, which has gained 10% on the dollar since May.
The partly managed but most actively traded emerging-market currency was predicted to edge up 1.3% to 6.38 per dollar in the next 12 months.
“We see positive drivers on all fronts for the yuan in 2021. We expect the country’s positive growth outlook and attractive yields to continue to appeal to foreign investors,” said Irene Cheung, senior FX strategist at ANZ.
“(But) the pace of yuan appreciation will hinge on the economic, inflationary and yield curve developments in the US Domestically, we watch if China will make another push for yuan internationalisation and capital account convertibility. Any move to liberalise capital outflows will ease upward pressure on the yuan.”
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