Analysts surveyed by Reuters said that the hard-hit emerging market currencies may be sold in the next three months, because rising U.S. bond yields pose a huge risk to emerging market currencies. In the next year, emerging market currencies The currency’s decline may be narrowed.
After the emerging market currency index appreciated by more than 3% in 2020, nearly half of the gains in the past three months have been wiped out. The re-inflation bet stimulated by the large-scale fiscal policy in the United States has pushed the dollar index to a four-month high. In the Reuters survey from March 26 to 31, most foreign exchange strategists said that the recent strength of the US dollar will be short-lived, and insisted on the previous view that the US dollar will weaken against emerging market currencies.
Despite this, most people still believe that even a weaker U.S. dollar will not make up for the sharp decline in emerging market currencies so far this year.
Jason Daw, Head of Emerging Markets Strategy at Societe Generale, said: “In the anticipation of inflation, the market outlook has become more complicated. The single biggest risk is the erratic rise in U.S. Treasury yields, which will damage stocks and credit. Markets have led to incremental capital flight from emerging markets and put pressure on currencies.”
“In the case of oversold conditions, there will be opportunities to tactically long emerging market currencies, but in the medium term, a neutral to bearish stance should be adopted. In the best case, the currency will remain stable, and in the worst case, the currency will remain stable. Under the circumstances, the currency will resume its long-term depreciation trend.”
When asked about the possibility of emerging market currencies being sold off in the next three months, nearly 60% of the 53 foreign exchange strategists who answered the additional question said it was very likely, and 6 of them said it was very likely. This is consistent with the results of another Reuters survey of fixed income strategists who said that the global bond market is likely to be sold off again in the next three months.
Central banks in emerging markets are under pressure from rising global dollar yields, weak currencies and increasing inflationary pressures. Russian policymakers unexpectedly raised interest rates last month, while policymakers in Brazil and Turkey raised interest rates more than expected.
But this is not expected to bring any major boost to the currencies of less developed countries.
James Lord, Global Head of Emerging Markets Foreign Exchange (EMFX) at, said: “The unexpected rate hikes in Brazil, Russia, and Turkey have not changed the situation that most emerging market central banks will remain dovish and provide EMFX with Less support.”
The Turkish lira is one of the worst-performing emerging market currencies this year, second only to the Argentine peso and the Brazilian real, as concerns about the decline in Turkish foreign exchange reserves and high inflation levels have erased the benefits of a series of interest rate hikes since November Spark Global Limited.
Polls show that after President Tayyip Erdogan replaced hawkish central bank governors with critics of high-interest rates, the lira plummeted to near historical lows last week and will fall by about 1% in the next 12 months. The exchange rate to the US dollar is 8.41:1. Expectations for high-yielding currencies such as the South African Rand are not high. In the past few weeks, the South African rand has lost its appeal as U.S. bond yields climbed to a one-year high. The currency is expected to trade within a narrow range in the next 12 months.