The outlook for emerging currencies has remained remarkably steady through a sharp increase in market volatility, sticking to the view the US Federal Reserve will stay on course and hike rates as planned this year, a Reuters poll showed. Forecasts for currencies such as the Brazilian real, the South African rand and the Mexican peso in 12 months stayed practically unchanged at the start of February from a similar poll last month.
Consensus forecasts are projecting the US dollar to gain steadily against most key currencies as the Fed hints at lifting interest rates off record lows in June. The Fed reiterated in its latest meeting in January that it is inclined to raise interest rates later this year, even though inflation has undershot its target for more than two years. If policymakers change their mind and delay the rate hikes, as many economists advocate, emerging currencies would probably benefit from a longer period of extraordinary liquidity.
January was a month of unusual volatility in currency markets as other central banks scrambled to cut interest rates and purchase bonds to fend off deflation fears. The European Central Bank was the most remarkable example with its unprecedented plan that could inject more than 1 trillion euros in the economy through quantitative easing. The South African rand is expected to weaken to 11.65 in twelve months, compared to a 11.67 estimate one month ago, weighed on by its stubborn current and fiscal account deficits.
The Mexican peso, which lost 1.6 per cent in January to 14.98 per dollar, is expected to regain some ground and trade at 14.17 in one year's time. Last month's forecast was 14.00. While strategists forecast the Turkish lira to trade at 2.47 in twelve months - down from Tuesday's close of 2.40, the Russian rouble is expected to actually gain against the dollar, although marginally, to 63.475.
Tracking the global swings, the Brazilian real in January touched nearly two-month highs and later weakened to 2.68 per dollar. It is expected to slide to 2.81 per dollar in 12 months, compared to an estimate of 2.80 per dollar in January's poll. As they wait for the Fed's next steps, analysts have overlooked other serious risks to the Brazilian currency, such as a potential energy rationing and repercussions from a massive corruption scandal at state-run oil giant Petrobras, which could accelerate the country's expected fall into recession. "There a risk we'll see an abrupt energy rationing, and then these forecasts will need to be revised to show an even weaker real," said Rodrigo Melo, an economist with Icatu Vanguarda asset management firm, in Sao Paulo.