Emerging market currency gains will probably be dominated by high-yielding currencies rather than low-risk bets next year as economic growth finally recovers in response to lower interest rates, a Reuters poll found.
Three-quarters of 40 strategists and analysts polled by Reuters said next year would be dominated by high yielding emerging market currencies.
ING Financial Markets wrote that while it sees a modest slowdown in Chinese growth, it expects recoveries in the likes of Brazil, Russia, Mexico, India and several other Asian countries, meaning the growth outlook favours emerging versus developed market currencies.
The Brazilian real is expected to be one of the notable gainers in emerging markets against the dollar, firming to 3.97/$. In a difficult year so far for emerging market investors, currency markets looked to safer bets in general, shunning high-risk-reward pairs such as the South African rand against a very strong dollar.
The high-yielding rand might not even be part of that theme next year as official data this week confirmed the economy contracted 0.6% last quarter, raising concerns that a recession is currently in play.
But the currency will likely remain fairly resilient in the face of many challenges, slipping 3% to 15 per dollar in three months and then stay there. "After all, some of these large emerging market monetary easing cycles and big currency declines should be providing some support," the ING note added.
South Africa's Reserve Bank is probably one of the few major emerging market central banks that, unlike peers such as Mexico and India, has not taken part in easing rates this year.
Citi analysts wrote that notwithstanding the Central Bank of Turkey's cumulative easing of 1,000 basis points since July, the lira has been holding up relatively well. "To be sure, the strong current account adjustment -underpinned by the unprecedented import compression - and the Fed's dovish pivot have played an important role in supporting the currency," wrote analysts at Citi.
However, the Reuters poll suggests the lira - which was considered very cheap earlier this year - will be tested next year, to the tune of about 10% losses to 6.34 per dollar.
Low volatility is expected to be part of next year's theme that supports "carry trades" as investors currently do not expect another reduction in US rates until at least the middle of 2020, probably pushing out any possibility of hikes capable of sending markets into a frenzy.
"Carry trades" comprise a strategy where investors benefit from holding a higher-yielding currency borrowed in a lower-yielding one. In Latin America, an outburst of protests is adding pressure on the central banks of the region's two main economies, Brazil and Mexico, to keep easing in order to accelerate tepid growth and avoid an ugly social outcome as in Chile, Ecuador and, to a lesser degree, Colombia.
Both currencies are entering the new year on the defensive, on worries about the effectiveness of reforms and outstanding trade issues with the United States. Still, Mexico's peso fared better than other major Latin American currencies this year, helped by recent positive developments on the US-China issue.
"Local monetary policy should also be supportive of peso behaviour, as the easing bias of Banxico is likely to remain cautious, with rate cuts of 25 basis points more likely than the 50bp cuts advocated by a minority of Board members," wrote Citi.
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