Emerging market currencies are expected to remain above their record lows for the rest of 2016 after their recent rebound, a Reuters poll showed, another sign that a five-year rally in the US dollar had run its course. Thirty-nine of 53 currency strategists surveyed worldwide said a return to recent lows by the end of the year was unlikely for currencies such as the Brazilian real, Turkish lira and the South African rand, although some face political struggles and credit downgrades.
Currency forecasts in the poll, taken this week, backed up that view. The lira is expected to weaken to 3.06 against the greenback, the rand to 16.00 and the real to 3.90 in 12 months, but they would still be stronger than their recent lows. "I do not see a return to record lows at the moment as emerging markets data in general has been okay. External headwinds do seem to have picked up a touch, mainly global growth worries," said Christopher Shiells at Informa Global Markets.
Shiells added that gradual US rate increases should not cause a return to lows for emerging FX. Economists polled by Reuters last month still forecast the Federal Reserve will raise rates in June, but their conviction is fading. Financial markets are pricing in only a single increase, in December. High-yield currencies have regained some ground against the US dollar since January as investors grew increasingly skeptical of interest rate hikes in the United States and less fearful of a hard landing in China.
"China remains the big risk, but again at the moment the economic slowdown is being managed, and so we have seen commodity prices stabilize, but this is the big downside risk," Shiells said. Brazil's real, Colombia's peso and Russia's rouble have been the best performers, all gaining around 10 percent so far this year. The rebound in emerging market currencies came as a surprise to many after a rocky start to 2016, fueled by worries over China's economy. But currencies have recovered since then, and strategists have upgraded their views in recent monthly Reuters polls.
As pessimism ebbed, emerging markets received $26 billion of non-resident portfolio inflows in April, following a 21-month high of $37 billion in March, according to data by the Institute of International Finance. The strength of emerging market currencies has raised eyebrows among some analysts, who fear selling pressure will soon follow. Strategists say the dollar is set to strengthen against major currencies such as the yen and the euro. However, UniCredit strategist Kiran Kowshik said many emerging market currencies, such as Turkey's, South Africa's and India's, remained poised to gain in coming weeks. "As we enter May, the adage 'sell in May and go away' could apply more to local-currency debt, but flows into emerging market equity could continue," he wrote in a note.
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