Emerging market FX set to falter again this year

By Vuyani Ndaba and Hari Kishan

JOHANNESBURG/BENGALURU (Reuters) – Emerging market currencies will cede more ground against the dollar this year, reversing the brief rally at the end of 2019, Reuters polls of foreign exchange strategists found.

Last year was marred by the U.S.-China trade war, which forced investors to take refuge in safe havens and proved to be painful for emerging market assets.

Major emerging currencies staged a rally of sorts in the last quarter of 2019 on hopes of Washington and Beijing inching closer to less fractured trade relations, but the political tension between the U.S. and Iran has poured cold on that already.

“As the economic cycle is nearing its endgame and markets continue to face elevated risks, more emerging market currency weakness lies ahead,” noted currency strategists at Societe Generale. “We expect modest depreciation of 5% in spot EM FX.”

The dollar was predicted to reign supreme again after dominating currency markets over the previous two years, according to the latest Reuters polls. [EUR/POLL]

Sixteen of the 20 emerging market currencies polled Jan. -9 were forecast to weaken versus the dollar in 2020 after having taken a beating for the better part of the previous two years.

A majority – 5 of 62 – of currency strategists chose either developed market currencies to outperform the greenback or said currency was likely to knock the dollar off its perch.

The remaining 27 picked emerging market currencies, which shows lack of conviction among forecasters despite these assets looking attractively cheap.

“FX markets remain priced to more optimistic growth outcomes which is a risk. We take a cautious approach to 2020 trades given limited visibility around key political events and uncertainty surrounding global macro momentum,” noted Meera Chandan, FX strategist at JP Morgan.

The World Bank in its latest report suggested the global economy was poised for a fragile recovery, beset with risks, which could weigh further on emerging markets.

Indeed, there was respite predicted for either the battered Chinese yuan or the Indian rupee over the coming year. [CNY/POLL] [INR/POLL]

“The most important driver of China’s currency is now economic slowing, which is increasing in scale and scope,” said Lee Hardman, currency analyst at MUFG.

“Though stimulus is expectedR0;we think the government will reap much less yang for the yuan – and more yin: Rolling over dud projects increase growth,” he added.

The resilient South African rand was expected to sell off over 5% to hit 15 per dollar in six months and then keep steady.

With the government expected to set its budget next month for the next three financial years, the rand faces some more challenges as ratings agencies keep watch.

“Volatility will continue to remain a feature of the rand outlook in 2020, and we expect that the currency will give back some of its December outperformance as we head towards the February Budget – and a potential Moody’s downgrade,” noted strategists at Goldman Sachs.

The highly volatile Turkish lira was forecast to shed almost 9% to 6.40/$ by end-December, a consistent expectation in previous surveys.

Latin America’s currencies were forecast to tread carefully in the face of continuing political tensions in the region and worries over more protectionist talk in the U.S. presidential election campaign later in 2020. [BRL/POLL]

But last month, emerging market currency gains, already in full swing, were expected to be dominated this year by high-yielding currencies rather than low-risk bets as growth finally recovers in response to lower interest rates around the globe.

Low volatility was expected to be part of this year’s theme that supports “carry trades” as investors did not expect another reduction in U.S. rates until at least the middle of 2020, delaying the likelihood of hikes capable of stoking a market frenzy.

(Additional reporting by Gabriel Burin in Buenos Aires; Editing by Ross Finley and Nick Macfie)


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