Emerging Market Currencies Face Uphill Battle to Recover Losses
Diminishing Rate Cut Expectations to Impact Emerging Market Currencies
Most emerging market currencies are expected to struggle in recouping losses against the dollar in the coming months, according to a Reuters poll of FX strategists. The rally in the emerging market currency basket has stalled due to higher U.S. Treasury yields, leading to a 1.2% decline for the year.
Impact of U.S. Economic Data and Fed Policymaker Comments
Expectations for aggressive rate cuts from the U.S. Federal Reserve have diminished, partly due to better than expected U.S. economic data and hawkish comments from Fed policymakers. This has led to a 3% increase in the dollar in a short period, impacting emerging market currencies.
Forecasts for Emerging Market Currencies
According to the poll, almost all emerging market currencies will struggle to recoup year-to-date losses six months from now. This is due to the fact that the rally that was anticipated in these currencies has already occurred, and they are considered to be relatively fairly priced.
Factors Affecting Emerging Market Currencies
Emerging market currencies are largely dependent on the global interest rate cycle, mainly led by the Fed. Additionally, growth headwinds in China continue to present a key obstacle to their performance.
Forecasts for Specific Currencies
The Indian rupee is predicted to gain only around 0.6% by end-July, while the Thai baht and South Korean won are expected to gain around 3.5% in the next six months. The Brazilian real is forecasted to recoup its 1.3% losses, and the Russian rouble is expected to lose nearly 2%.
The Turkish lira, on the other hand, is anticipated to weaken over 9% in the next six months.
Outlook for the South African Rand
Goldman Sachs noted that the rand offers one of the most attractive combinations of value and real carry, supported by more benign inflation forecasts. However, it remains one of the most dollar-sensitive EM currencies.
Overall, the outlook for emerging market currencies remains uncertain, with various factors influencing their performance in the coming months.
