Emerging market strategists were cautiously optimistic that the sector’s commodity-linked currencies will continue to rally in the coming months, but a much slower pace of vaccine deployment will keep high yield researchers nervous, a Reuters poll.
A third of 45 strategists in the Reuters poll from May 28 to June 3 said the rally in emerging market currencies linked to commodities would continue for six months, while 14 said it would last for up to a year.
A delicate split has emerged among strategists predicting light EMFX long or short positions over the next six months, with a slight bias in favor of a slight strength against the dollar – a sign of cautious optimism.
High-yielding currencies like the South African Rand and Mexican Peso have ended four of the past six quarters on a stronger footing, boosted by increases in commodity prices and as COVID-19 restrictions hurt the International trade.
The emerging markets currency index (.MIEM00000CUS), heavily weighted in favor of China given the size of its economy, more than offset the losses of 2020 after economies gradually reopened.
However, low yielding securities like the Thai baht should support emerging currency markets, with the baht strengthening 1.3% to 30.81 / $. The ruble should also help emerging currencies as a whole maintain their gains, up 1.5% to $ 70 / in 12 months.
Analysts said they preferred emerging export-oriented Asian currencies like the baht, Chinese yuan, Singapore dollars and Hong Kong dollars on long positions due to firmer bets on prospects for sustainable economic growth. .
David Hauner of Bank of America Merrill Lynch wrote that he expects another EMFX rally in the summer (northern hemisphere) on improving growth and still not overcrowded positioning.
“However, we will keep a close eye on sentiment and positioning indicators to reduce exposure when significant foam appears, as happened around the turn of 2020 to 2021,” Hauner added.
Goldman Sachs analysts note that some tactical caution in emerging currencies was warranted at current levels if some of the favorable winds reverse, with US 10-year rates (yield) at local lows but equity markets and from raw materials to local highs.
“Macro-valuation measures still support EMFX over the medium term, reflationary rate hikes restore emerging currency carry and a successful deployment of emerging vaccines could be the key to both a cyclical reopening in emerging countries, as well as new strength in emerging currencies, ”added Goldman Sachs analysts.
However, vaccine deployments in emerging countries have been much slower than in developed countries where health authorities are much closer to meeting vaccination targets and allowing economies to be more open to trade.
South Africa, which only reached its first million vaccinations this week, is second among 29 countries tracked by Fathom Consulting on Refinitiv Datastream and is 39 million jabs away from its 60% target.
Clearly, the 8% rand gains so far this year tops a list of 20 EM currencies tracked by Reuters – despite much slower vaccine deployments – followed by the Chinese yuan at around 2%. China administered 20.4 million doses on June 1 alone.
The high-yielding rand climbed to $ 13.50 / $ on Thursday, trading at its highest level since early February 2019.
However, the poll median for the rand is for a correction of around 5% to 14.35 / $ in 12 months while the median suggests that the yuan will gain more than half a percent to 6.35 / $ in 12 months. 12 months.
The People’s Bank of China (PBOC) has a carefully managed floating exchange rate regime and in a warning to speculators this week, the PBOC increased its reserve requirements for currency deposits in Chinese banks in order to curb a yuan that has hit a three-year high against the dollar.
(For other articles from the June Reuters currency poll:)
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