Emerging market currencies are likely to return to record lows in 2016, a Reuters poll predicted on Thursday, although a recent respite may last for a few more months if the Federal Reserve passes on a December interest rate rise, which many now expect.
Currencies in Brazil, Turkey and South Africa were likely to show some stability this month, holding recent gains as investors wait for clearer signs of when that rate hike will be delivered. Federal Reserve Chair Janet Yellen on Wednesday said a December rate hike remains a "live" possibility, but also reiterated that rates would rise only slowly from then on to nurture the US economic recovery.
The allure of safer havens is likely to return only in 2016, which will add strength to the US dollar, although a hike from the Fed next month would also push it higher. The Brazilian real is expected to weaken past 4 per dollar as early as in January, the Turkish lira past the 3-per-dollar mark, and the South African rand to 14, the poll showed.
All these currencies hit their weakest levels for many years in September, in some cases the weakest ever, but firmed slightly in October on hopes the Fed would delay any hike. The dollar is expected to gain against major currencies such as the euro and yen, as those respective central banks appear inclined to loosen monetary policy even further to try to revive inflation, the global Reuters FX poll also found.
"Expectations for (Fed) tightening are sufficient to create an adverse environment for emerging markets, given the possibility of reduced carry and the prospects of dollar gains," RBS strategist Gabor Ambrus said. South Africa's rand is expected to trade at 14 per dollar in 12 months - just six cents away from record lows it last touched in September. The most bearish forecaster called it at 15.40.
Investors are shunning commodity-rich Africa as China's appetite for its resources wanes, putting mining companies including Lonmin under serious financial pressure, or in the case of Glencore, selling assets. "The commodity slump is likely to continue to afflict commodity currencies this year and next, although to a lesser extent in 2016," Investec Securities economist, Annabel Bishop, said.
Brazil, suffering even worse stagflation than South Africa, is expected to see its currency around record lows in 12 months, at 4.12 per dollar. The most pessimistic forecaster, Oxford Economics, projected it at 4.60 per dollar within a year. The Brazilian central bank has been more active in intervening in currency markets, while South Africa's benchmark rate is expected to be hiked 75 basis points to 6.75 percent next year.
"We remain bearish on the Brazilian real and like buying dollars on dips as the political uncertainty will likely continue," BofAML strategists, led by David Beker, wrote. The Turkish lira is seen at 3.13 per dollar in one-year's time, also a record low. Investors are bracing for volatility as the country's ruling AK Party, the winner of this weekend's elections, tries to change the constitution to create an executive presidential system.
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