Mixed outlook for emerging market currencies — survey

Yield-hungry investors will trade cautiously in risky emerging market currencies in 2019 against the dollar despite the US Federal Reserve’s recent dovish stance, a Reuters poll found, although there is still interest. 

“The outlook for high-yielding currencies remains constructive due to the increasingly accommodative messaging from both the ECB [European Central Bank] and the Fed,” said Mike Keenan, a strategist at Absa Capital.

Taken in the past week, the survey showed a mixed outlook for emerging market currencies, as Brazil’s real is expected to firm up more than 4% to 3.7/$ while SA’s rand remains relatively steady at 14.30/$ in six months.

“That said, a deep global slowdown poses a significant risk to the longevity of the carry trade because under such a scenario, market volatility is likely to spike and investors will probably become more risk averse,” Keenan said.

“Carry trades” is a strategy used by investors to borrow in currencies where interest rates are low and thereafter invest in countries where yields are high, such as in emerging markets.

A similar survey in September expected many emerging market currencies to bounce back at least partially against the dollar this year as weakening growth momentum took the shine off the greenback.

However, Turkey’s lira, will play no part in any lure for higher yield returns as it is expected to continue falling – over 11% to 6.25/$ in a year – amid rising tensions with the US and potential uncertainty after local elections.

Emerging market currencies have not yet shot the 2019 lights out compared to recent bouts when carry trades were in full favour among investors as the Fed pumped in massive quantitative easing liquidity.

For the trade to work liquidity needs to be plentiful, the global economic backdrop benign and, importantly, currency volatility next to nothing.

“We remain optimistic on emerging market foreign exchange and debt for 2019 and 2020,” wrote macroeconomic research house Continuum Economics in a note.

“A reversal of dollar strength and the Fed’s change in monetary policy outlook are key to our view,” the note added.

A separate Reuters poll at the end of March suggested the Fed is done raising interest rates until at least the end of next year, according to economists in a Reuters poll who gave a 40% chance of at least one rate cut by end-2020.

The rand is currently enjoying the best performer spot this week among emerging market currencies track by Reuters with over 2% gains pushing it to 14.18/$ after Moody’s said late on Friday it would not publish a review of the country’s sovereign debt rating as indicatively scheduled.

Keenan said due to lingering idiosyncratic risks, the rand underperformed fellow high-yielding currencies during the first quarter. However, following this week’s swift recovery, he said it was now back to fair value relative to its peers.

Though Continuum Economics warned Brazilian rates had already priced in much of the positive impact of the pension reform and with the central bank unlikely to hike this year, it does not expect yields to become much more attractive.

SA’s Reserve Bank kept its repo rate unchanged at 6.75% in March and Reuters polls suggest it will continue on that path until early 2020 when it is expected to lift rates by 25 basis points.

Reuters