JOHANNESBURG/BENGALURU, Feb 4 (Reuters) – Emerging market currencies will struggle to stem short-term losses as the U.S. Federal Reserve raises interest rates past the zero boundary, but emerging market currencies countries where central banks have already started raising rates will outperform the rest.
A Reuters poll of market strategists conducted from January 31 to February 31. 3 suggests there won’t be a repeat of the chaos of 2013, when the US Fed’s decision to scale back bond purchases hurt emerging market currencies across the board.
More than 70% of respondents to an additional question — 23 out of 32 — said rate-rising currencies like the Brazilian real and Russian ruble will weather the storm better than emerging market currencies during this episode.
While these two central banks have already raised rates by 875 basis points and 425 basis points, respectively, the Fed has only reduced its bond purchases, although it expects a rate hike. at its March meeting.
Emerging market currencies started the year strongly, in part due to an overall weaker dollar, with the Colombian peso, Brazilian real and South African rand gaining up to 5% to top the charts. a list of 20 currencies tracked by Reuters against the dollar.
Historically, high-risk, high-return currencies have almost always weakened at the start of a Fed hike cycle. The context of a slow emergence of a deadly pandemic does not seem to be an exception.
“A hawkish Fed will keep local emerging market markets on their toes, with rising carry likely to come into play as a major currency driver only later,” said Jonny Goulden, emerging markets strategist at JPMorgan.
“The wide range of possible outcomes of Russian-Ukrainian tensions remains an important source of bilateral risk for emerging assets,” he added.
Longer term, competition for capital inflows is set to intensify as central bankers around the world rein in rising local inflation, with the United States battling its own fastest inflation since 1982.
Barclays analysts have written that in emerging markets, most central bank tightening cycles are underway and hence expectations about future rate paths are better set. The real return outlook should boost the relative performance of emerging currencies over the long term.
“We expect the central bank’s proactive tightening cycles in BRL and MXN to be rewarded with currency appreciation as inflation begins to decline, increasing the supply of real return,” the note added.
The central banks of Brazil and Russia rose the most last year in the list of those tracked by Reuters, while South Africa and India remained largely dovish, moving only only once with the rates and not at all, respectively.
The South African rand and the Indian rupee were expected to weaken between 1 and 2% to 15.72/$ and 75.5/$ in six months while the Russian rouble, which has fallen nearly 3% so far this year amid tensions between Russia and the United States over Moscow’s troop buildup near Ukrainewill gain almost 5% to 73.1/$.
“We are still awaiting a diplomatic solution and a de-escalation of tensions. This will allow the ruble to rebound in the coming year. The ruble is trading much weaker than traditional fundamentals such as the price of oil and yield spreads,” said Lee Hardman, currency analyst at MUFG.
“If we are wrong and there is another invasion of Ukraine, the ruble will be significantly weaker.”
Turkey’s battered pound plunged 44% last year, making it by far the worst performance in emerging markets and marking its worst year since President Tayyip Erdogan came to power nearly two decades ago. .
It is expected to plunge another 15% to $16.0 in a year as it grapples with a inflationlast measured just below 50%.
“We didn’t have long to wait for things to get worse, with the lira balance in a wide range… inflation will climb even higher in the coming months, and real rates will slide deeper into negative territory,” Maya Senussi, senior economist at Oxford Economics, said.