Written by Vivek Mishra
BENGALURU, April 4 (Reuters) –Emerging market currencies are expected to strengthen over the next year, but much of that will depend on whether the Federal Reserve cuts interest rates from around mid-year, according to a Reuters survey of currency analysts.
Central banks in developed countries are widely expected to cut interest rates faster than central banks in developing countries, which will direct capital to emerging markets, strengthen emerging market currencies and help central banks manage inflation. there is a possibility.
But almost all of that depends on how much the Fed cuts interest rates. The strength of the U.S. economy has kept dollar bulls in power, and analysts who had expected the dollar to fall in response to the yet-to-be-delivered interest rate cuts were wrong.
As a result, risky emerging market currencies have been in deep deficits since the start of this year, and have been losing money against the dominant dollar for years.
Most are expected to rise by the end of June as the Fed is expected to begin its easing campaign in the same month, but a survey of about 60 analysts from March 28 to April 3 According to a Reuters poll, volatility is expected to increase in the short term.
“EM currencies are firming up and we expect pressure to ease as we prepare for the start of the Fed’s rate cutting cycle around the middle of this year,” said Abhay Gupta, emerging Asia financial and currency strategist at BofA Securities. Ta.
“While this may signal a broader medium-term rise in interest rates and currencies, domestic developments will determine the relative winners and the timing of market-wide moves. Around mid-year, the Fed ‘s rate cuts could allow high-yield stocks like Indonesia to start cutting rates significantly, improving their cutting cycles and attracting more carry flows. ”
Meanwhile, emerging market carry trades, which involve borrowing in low-yielding currencies like the Japanese yen and investing in higher-yielding currencies, have been effective for years, particularly benefiting Latin American countries. BRL/Paul
However, the carry trade is losing momentum as some central banks in the region have already begun cutting interest rates.
Analysts at the poll said developing countries’ currencies would weaken if the interest rate differential between emerging and developed countries narrowed.
The rand, like most emerging market currencies, will be influenced by global factors such as the direction of the US dollar. The dollar was expected to rise about 1% to $18.65 over the next six months.
The outlook for Asian currencies is similar.
China’s tightly controlled yuan has already fallen about 2% this year, but was expected to recover some of that loss over the next six months.
The Indian rupee has been stuck in a very narrow range for more than a year due to intervention by the Reserve Bank of India, and was expected to remain between 82.50 and 83.11 rupees to the dollar for the next six months. nL2N3GC0LA
Other Asian currencies (Thai baht, Korean won, Indonesian rupiah, Malaysian ringgit, Philippine peso, Taiwanese dollar, Vietnamese dong) are expected to appreciate by 1.6-4.9% over the next six months.
(More articles from April’s Reuters FX Survey here: nL3N3GB1X9)
Report by Vivek Mishra. Voted by Veronica Khongwir, Anant Chandak, Devayani Sathyan, Vijayalakshmi Srinivasan, Sarupya Ganguly.Editing: Ross Finley and Barbara Lewis
