Vuyani Ndaba, Indradip
(Reuters) – Weakening emerging-market currencies probably won’t regain their coronavirus-induced 2020 losses against the dollar over the coming year, but for now at least they remain on a recovery path, a Reuters poll found.
From a peak reached early in the year, the emerging-markets currency index weakened over 7.0% to hit 2020 low in late March. It has since recovered with around a 3% gain on bets of a quick economic rebound and more stimulus even as U.S.-China relations deteriorate.
The Turkish lira, South African rand, Russian rouble, Brazilian real and the Indian rupee have recovered over 7%, 12%, 17%, 15% and about 2%, respectively, against the dollar from this year’s intraday lows.
Most of the emerging-market currencies were forecast to extend their recent gains or remain near their current rates over the coming year, the June 1-3 Reuters poll of foreign exchange strategists showed.
Major Latin American currencies and the Indian rupee were expected to retain recent gains against the U.S. dollar over the coming year. [BRL/POLL]
Despite the latest optimism, emerging-market currencies polled on were not expected to recoup even half their losses so far in 2020 and will remain below pre-coronavirus highs at the end of this year.
“As long as there is no bad news, EM can grind higher. But how long can this last in the face of a bleak structural outlook? By the summer, an escalation in geopolitical tensions into the U.S. elections is likely to reassert the weak backdrop,” said David Hauner, head of emerging markets strategy at BofA.
“Sadly, COVID-19 is far from under control in many of the big EMs. Nevertheless, depressed sentiment creates a low bar for positive surprises as economies emerge from the lockdown.”
Many countries have started to ease lockdown restrictions imposed to stop the spread of the virus, which has infected over 6.5 million people globally. But the economic recovery across the world looks unlikely to be a quick one. [ECILT/WRAP]
Still, in response to an additional question, nearly 60%, 30 of 52 strategists, said the recovery in emerging-market currencies for this year was still intact rather than abated or already run its course.
When asked if a yuan devaluation would hurt other emerging- market currencies in the short-term, a majority, 23 of 38, analysts said that risk was “low” or “very low”. The remaining 15 respondents said the risk was “high” or “very high”.
The Turkish lira, though, was predicted to erase all of its recent gains over the coming year, becoming one of the worst performers among its peers.
One of the biggest gainers against the dollar this month among 20 emerging-market currencies tracked by Reuters, the South African rand was expected to weaken over 3.0% to 17.54 to the dollar in six months, but was forecast to gain in a year to 17.00, around where it was trading on Thursday.
But bets in favour of emerging-market currencies have largely been driven by the recent fading allure of the dollar, which was forecast to continue its losing streak. [EUR/POLL]
That was despite the ongoing U.S.-China political tensions, which pushed the Chinese yuan to weaken to its lowest since September, around 7.18 per dollar last week. But it has since gained and was last at around 7.12/$ on Thursday.
The partially-traded currency was forecast to strengthen to 7.07 to the dollar in six months, and to 7.00 in a year. But several risks remain.
“Global headwinds have returned in the form of soured U.S.-China relations and a materialization of what are still currently empty threats from the U.S. could derail the EM currency recovery and favour safe-haven currencies,” said Francesca Beausang, an economist at Continuum Economics. (For other stories from the June Reuters foreign exchange poll:)
Reporting and polling by Vuyani Ndaba in Johannesburg, Indradip Ghosh in Bengaluru and Gabriel Burin in Buenos Aires; editing by Rahul Karunakar, Larry King