The US dollar is likely to set new records against emerging market currencies this year, although its climb may be slower than in 2015 and possibly hampered by more frequent bouts of volatility, a Reuters poll suggested. Currency strategists gave weaker exchange rate forecasts for major emerging countries such as China, Brazil, South Africa and Turkey in the monthly survey, pointing to a sixth straight year of dollar gains against most high-yielding currencies.
The dollar may be nearing its peak, and poll forecasts point to a slower pace of gains against most currencies in 2016. The Brazilian real plunged 33 percent last year and is forecast to weaken 7 percent more in 2016, while the Turkish lira fell 25 percent in 2015 and is expected to slip another 3 percent this year, for example.
Still, uncertainty over the health of the Chinese economy and persistently low prices of raw materials such as oil and iron ore will probably give investors sufficient reason to keep hoarding dollars and selling emerging currencies for yet another year, strategists in the poll said. China's yuan is forecast to weaken just 2 percent this year as the central bank lowers its midpoint fixings and the dollar rises in anticipation of higher interest rates in the United States.
Emerging market currencies have been hit by a sell-off in the first week of trading this year after weak economic data in China rekindled worries over global growth and halted trading on Chinese equity markets on two days. That bump may have been a harbinger of an unusually volatile year ahead. On Thursday the People's Bank of China lowered the yuan midpoint by 0.5 percent on the day to the weakest since March 2011, sending Chinese shares, regional currencies and commodities tumbling.
Scotiabank strategists Pablo Breard and Shaun Osborne said the long stretch of dollar gains since 2011 may have made markets less stable than in recent years. "The 'easy' money being long dollar has already been made. As the rally enters the mature stage of the cycle late in 2016, the trending nature of the dollar rally may turn into a choppier and more volatile phase of movement that is more typical of market trend transitions," they wrote in a note. There may be two other reasons for strong market swings this year. First, any surprises in the recently started cycle of interest rate hikes in the US could quickly increase or reduce risk aversion in world emerging markets.
Second, on a local scale, slower growth and stagnating living standards could stoke popular discontent in many countries. That in turn could raise instability even with a smaller number of elections compared with the past two years. Brazil is an example, with prospects of another sharp decline in the exchange rate as the country sinks into a historic recession. The opposition has pushed for the impeachment of President Dilma Rousseff about three years before the end of her term.
For South Africa, confidence in the economy is also on the wane. A local business confidence index published on Thursday fell to its lowest in more than two decades in December. That was at least in part due to President Jacob Zuma's sudden decision to sack his respected finance minister last month.
"The unexpected dismissal of South Africa's finance minister Nene undermined investor confidence; however, the speedy appointment of (Pravin) Gordhan as his replacement has gone some way to allay concerns," wrote analysts at RBS. "That said, the scars remain and amplify South Africa's economic woes; we continue to view South Africa as the region's 'weakest link', and remain bearish on the rand." South Africa's economy is expected to grow just 1.6 percent next year from an estimated 1.4 percent last year.
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