According to forex strategists, the coming months will see emerging market currencies record a rise, thanks to better prospects of global growth.
This is partly because of the reopening of the Chinese economy. The emerging market forex has already had a good start to the year.
However, the last two sessions have seen the US dollar record gains because the jobs data for January turned out to be stronger than expected, reducing market expectations about interest rate cuts from the Fed.
Lower inflation
But, strategists have forecast that as long as US inflation continues to decline, emerging market currencies will deliver a better performance than major currencies.
They did add that this would not mean a straight line upward. As long as inflation continues to stay moderate and China continues to open up, risk sentiment can see a boost due to acceleration in global/US growth.
This would benefit emerging market forex currencies. Currency strategists have said that they are expecting broad gains in these currencies in the next three months.
But, this only applies to high-yielding currencies, which do not include the Mexican peso, the Brazilian real, or the Turkish lira.
The risks
Some analysts said that there had undoubtedly been an improvement in sentiment after China’s economy had reopened and strict COVID curbs were lifted.
But, they also cautioned that this does not make it automatically positive for the yuan or China’s balance of payments.
Last year, there was an 8% drop in the Chinese yuan and it was predicted to only rise about 2% in a year to 6.62 per dollar.
Therefore, analysts said that there was a possibility that high-yielding currencies will record most gains in emerging markets, instead of low-risk bets.
Market strategists said that historically, riskier emerging market currencies have proven to be more resilient to a re-pricing by the Fed, as long as they continue to see strong growth.
The first casualties are usually the lowest-yielding currencies when the market decides to reassess the policy of the US Federal Reserve.
Mixed views
The forex market continues to be dominated by carry-seeking behavior. Carry trades usually get support from widening interest rate differentials.
This is because traders are able to borrow in currencies with a low-interest rate and purchase those that are offering a higher return.
Thanks to China’s reopening, commodity currencies are also expected to record some gains. There is a 0.3% drop expected in the Russian ruble.
But, there is a 0.1% to 1.2% rise expected in the Australian, Canadian, and New Zealand dollars. A high-yielding currency, the South African rand has suffered losses of 4% this year so far.
However, it is expected to make a recovery of 3% in the next three months, which would take it to a value of 17.07 per dollar.
This is in spite of serious economic challenges like widespread shortages of electricity, which promise to stop growth in the year.
The Turkish lira is also expected to see a drop of 14% in the next year to a value of 21.9 per dollar.
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