Volatility will remain high in emerging foreign exchange markets all year, but that is unlikely to send currencies back to all-time lows as hopes of fewer interest rate hikes in the United States encourage risk-taking, a Reuters poll found. Forty-six of 51 strategists polled this week at major financial firms globally said the recent volatility in emerging currencies would continue for the rest of the year. Despite that, the poll forecasts reinforced the idea that emerging market currencies have already gone through the worst of their five-year-long drop.
Median forecasts for the Turkish lira, the Brazilian real, the South African rand and other currencies improved from a poll last month. They were not strong enough to suggest a rally is about to begin but showed a smaller likelihood of new record lows against the US dollar over the next 12 months, despite recent credit rating downgrades. The lira is expected to weaken to 3.11, the rand to 16.20 and 4.025 for the real per dollar in 12 months.
Last month the Federal Reserve held interest rates steady and gave fresh projections showing policymakers expected two quarter-point hikes by the year's end, half the number seen in December. Minutes from the Fed's March 15-16 policy meeting added to signs the bank is unlikely to raise interest rates before June. "A number" of policymakers, according to the document, argued headwinds to growth would probably persist.
"I don't think we are going to bounce suddenly into a stronger dollar world," said Peter Attard Montalto, emerging market economist at Nomura. "There is still support for emerging markets in the short term. Over the medium, that should get processed through the market."
Although economic growth prospects have not improved significantly in emerging markets, strategists bet that some of the cheap money being pumped by central banks into financial markets will fly south in search of higher interest rates. "Some of the fundamental conditions that led to strong dollar are now shifting, and we expect the dollar to remain broadly stable at current levels," Brazilian-based Itau Unibanco chief economist Ilan Goldfajn said.
The poll findings are in line with forecasts for currencies in developed markets, such as the euro and the yen, that suggested a forthcoming end to the long rise in the dollar. Major Asian currencies too are now expected to weaken much less over the coming year than previously expected, despite the likelihood that central banks there will ease policy further.
In Brazil, the foreign exchange depreciation was so intense it contributed to a sharp decline in imports. Hit by its worst recession in probably more than a century, Brazil had its biggest monthly trade surplus in 27 years in March - another reason to believe the dollar rally has mostly run its course. Part of the reason for continued volatility in emerging markets is local political risk. Impeachment proceedings have been at the centre of national debates in Brazil, where a vote is due in coming weeks, and in South Africa, were President Jacob Zuma on Tuesday survived an impeachment vote in parliament.