Emerging commodity exporter currencies to firm despite US yield appeal

Emerging market currencies of commodity-exporting nations are set to firm over the next 12 months as the world recovers from the coronavirus pandemic – and despite recent rises in US Treasury yields, a Reuters poll found on Thursday.

High-beta emerging market currencies, which last year achieved their best year since 2017 with gains of over 3%, have been in question after the benchmark 10-year US Treasury yield hit a one-year high last week.

Still, as investors ponder whether the world is entering a commodities cyclical upturn or a new supercycle, commodity-linked currencies are already firmer due to expectations of a boom.

Currencies of historically strong commodity exporters will trade resiliently. South Africa’s rand will strengthen to 14.95/$ in 12 months, the Chilean peso to 722.5 per greenback and the Peruvian sol to 3.51 per dollar, 0.1-4.0% firmer.

“Markets might downplay some of the bearishness in February and favour commodity currencies such as, and while shying away from (Central and Eastern Europe),” wrote Citi analysts.

In Brazil, the real was expected to gain about 12% in 12 months to 5.1 per US dollar.

In the March 1-3 Reuters poll, 38 of 63 FX strategists said commodity-linked currencies would outperform the dollar over the next three months rather than developed or broader emerging market currencies.

Goldman Sachs expects a rapid recovery in CEEMEA growth and said the still relatively favourable terms-of-trade dynamics on broad increases in commodity prices should support the South African rand through 2021.

South Africa’s mining tax income has already generated better-than-expected revenues.

Chile is far ahead in coronavirus vaccinations in Latin America compared with other countries in the region, while the Peruvian currency has been resilient to political turmoil, supported by booming copper prices.

Still, nearly three-quarters of 60 FX strategists said they were concerned a further rise in US yields would reverse gains in emerging market currencies made since 2020 lows, including two who said they were very concerned.

Several currency strategists argued that the jump in US Treasury yields was likely temporary and expected the dollar to weaken this year as it has traditionally done during global economic recoveries.

The fear now among investors is the Fed raises rates or tapers asset purchases sooner than expected, despite Chair Jerome Powell’s assurances the Fed would not.

“Rising real yields will likely accompany the change of Fed stance to tapering, which we expect will negatively impact EM asset prices. The Fed will likely announce in 4Q 2021 that it is tapering its current asset purchases,” said Jonny Goulden, who heads local emerging-market debt research at JPMorgan.

Supported by higher oil prices, the Russian rouble was expected to gain about 5% to 70.9 per dollar by this time next year.

The Chinese yuan, the most actively traded emerging market currency, was predicted to gain about 2% to 6.34 per dollar in 12 months.