Most emerging market currencies will continue last year’s rally against a tumbling dollar into 2021 as a thirst for higher yield and hopes for a successful coronavirus vaccine rollout helps drive gains, a Reuters poll showed.
A steep selloff in the dollar, which posted its largest annual loss since 2017 last year, helped a wider index of emerging market currencies gain more than 11% from March’s three-year low – a trend set to continue this year.
Most emerging market currencies which were polled about were forecast to extend gains, rising about 2% in 12 months, although some still will not have recouped coronavirus-induced losses, according to the Jan. 4-7 Reuters poll of 50 FX strategists.
“The outlook of Biden taking office has provided the market with hopes of an end to tariff wars and paired with a vaccine deployment it has created a benign environment for emerging markets,” Andreas Steno Larsen, chief global FX strategist at Nordea, said.
“We remain upbeat on EUR/USD, EM FX and risk assets in general into the start of this year and we don’t really want to question this narrative until the recovery is strong enough for both fiscal and monetary administrations to consider removing the foot from the QE/stimulus pedal.”
An improving global economic outlook as vaccines are rolled out, rock-bottom U.S. interest rates and ongoing bond purchases have dented the dollar’s appeal while expectations for additional stimulus, rising fiscal and current account deficits are likely to hurt the greenback more.
Around 80%, 38 of 48, FX strategists who answered an additional question said a search for higher yield and a successful vaccination programme would be the primary drivers of emerging market currencies this year.
The remaining 10 strategists cited domestic economic recoveries.
Asia, where the economic recovery has been strong, has caught an added boost from China’s yuan which has gained 12% on the dollar since May.
The partly managed but most actively traded emerging market currency was predicted to edge up about 1% to 6.40 per dollar by end-year.
“We see a strong renminbi appreciation bias to continue in 2021,” said Dirk Willer, head of emerging market strategy at Citi.
“As the PBoC’s policy exit is way ahead of other industrial economies, the already large interest-rate differential will likely remain. This could continue to increase next year, which helps attract large and persistent capital inflows and support continuous renminbi appreciation.”
China’s decision to cut the weighting of the U.S. dollar in a key currency index basket could push the yuan’s value higher against its peers this year.
The Indian rupee was forecast to gain about 1% in the next 12 months.
High-yielders on a roll
When asked which emerging market currencies would perform better this year, 23 of 44 FX strategists said high-yielding ones, 19 said commodity currencies and only two said low-yielding ones.
The high-yielding South African rand, which has recovered close to pre-COVID-19 levels, is expected to gain a further 2% to 15.0 per dollar in 12 months.
“The ZAR’s standing as an EM currency bellwether is likely to see it appreciating in 2021 as various market uncertainties are addressed and as positive vaccine/treatment developments enable a gradual normalisation of economic activity globally,” Jason Daw, head of emerging markets strategy at Societe Generale, said.
“South Africa’s exposure to the commodity complex and its strengthening trade linkages with resilient China should help to shield the ZAR from fiscal woes. The ZAR is likely to benefit from stronger commodity prices, improving global trade volumes and increased capital inflows into EM.”
Other high-yielders such as the Russian rouble, which appreciated after Saudi Arabia announced a big voluntary cut in oil production on Tuesday, is expected to recover further this year but will still be far from levels seen in early 2020.
“With other EM high-yielders performing strongly over the past couple of months, the rouble’s combination of high carry, undervaluation, and exposures to risk sentiment and commodity upside looks increasingly attractive,” Zach Pandl, co-head of global foreign exchange at Goldman Sachs, said.