Emerging market currencies to remain under pressure

Emerging market currencies are set to sink further into decade or even record lows against the dollar as interest rates start rising off zero in the United States, a Reuters poll predicted on Wednesday. A wide majority of FX strategists from all over the world said they are "confident" or "very confident" the dollar will extend its eight-month-long rally, already the most intense since the onset of the global financial crisis in 2008, despite trading sideways in February.
"We have viewed this consolidation as a lull in the uptrend rather than a sign of a deeper correction," wrote Jonathan Webb, head of foreign exchange strategy at Jefferies. Only 15 out of 78 strategists polled said they are "not confident" the rally, pointed as one of the main reasons for the weakness in emerging market exchange rates, will live on.
Fifty-three said they are "confident" the rally will continue, and 10 said they are "very confident". As a result, forecasts for the Brazilian real, the South African rand, the Turkish lira and other emerging currencies were all revised lower in the poll. In some cases, such as Brazil, the monthly forecast revisions have not been fast enough to keep pace with the rapid drop in the currency, which fell on Tuesday to the weakest level in more than 10 years at around 2.89 per dollar. "The expected rate hike by the Fed is strongly in favour of the US dollar," said Asmara Jamaleh, FX strategist at Intesa Sanpaolo. "Net long-dollar positions should rise further because other central banks are not going to follow suit."
If there is a chance the rally stops or backtracks, it lies in the possibility the Fed's much-anticipated rate hike is delayed beyond mid-year. "Expectations that the change in the US monetary policy could be postponed should bring some relief to exchange markets in coming months," said Danielle Aranha, an economist with asset management firm BrasilPrev. But the prevailing view suggests net long dollar positions will continue to rise as the dollar edges higher, according to 44 of 58 strategists who responded to an extra question. Last week's Commodity Futures Trade Commission data showed speculators trimmed bets which favour the US dollar, but it still was the ninth straight week dollar longs have hit at least $40 billion. "Growth and interest rate differentials ... provide a powerful magnet to prolong the US dollarization of investment portfolios in the coming months," Scotiabank analysts wrote.