FILE PHOTO: A money changer counts South African rand in Harare, Zimbabwe, May 5, 2016. REUTERS / Philimon Bulawayo
June 4, 2021
By Vuyani Ndaba
JOHANNESBURG (Reuters) – Emerging market strategists have been cautiously optimistic that the sector’s commodity-linked currency rally would continue in the coming months, but a much slower pace of vaccine launches will make high-yield seekers nervous, a Reuters poll revealed on Friday.
A third of 45 strategists in Reuters poll, May 28-June 3, said the rally in emerging market commodity-related currencies would last six months, while 14 said it would last up to a year.
A delicate split emerged among strategists, predicting mild long or short positions in EMFX for the next six months, with a slight bias towards slight strength against the dollar – a sign of cautious optimism.
Reuters survey chart on the outlook for emerging market currencies: https://fingfx.thomsonreuters.com/gfx/polling/xklpyadblpg/EMRG%20FX.PNG
High-yielding currencies like the South African rand and the Mexican peso closed four of the last six quarters stronger, hurting world trade through commodity price rallies and COVID-19 restrictions.
The emerging market currency index, heavily weighted towards China given the size of its economy, more than made up for the losses for 2020 following the gradual reopening of the economies.
However, low interest rates like the Thai baht are expected to boost emerging market currency markets, with the baht solidifying 1.3% to / $ 30.81. The ruble is also said to be helping EM currencies overall hold on to gains, which are up 1.5% to $ 70 in 12 months.
Analysts said they favor export-oriented emerging Asian currencies such as the baht, Chinese yuan, Singapore and Hong Kong dollars for long positions as they are more focused on sustainable economic growth prospects.
Bank of America Merrill Lynch’s David Hauner wrote that he expects another EMFX rally this summer (the northern hemisphere) when growth improves and positioning is still not overcrowded.
“However, we will keep a close eye on the sentiment and positioning indicators in order to reduce the risk if there is significant foam, as was the case at the turn of the year 2020 to 2021,” added Hauner.
Goldman Sachs analysts suggest that at current levels, some tactical caution is needed on emerging market currencies if the favorable tailwind reverses, with 10-year US interest rates (yield) at local lows, equity- and commodity markets are at local highs.
“Macro valuation metrics still support EMFX over the medium term, reflationary rate hikes rebuild the carry in emerging market currencies, and a successful launch of vaccines in emerging markets could be critical to both a cyclical reopening in all emerging markets and continued strength.” added Goldman Sachs analysts.
Still, vaccine adoption has been much slower in emerging markets than in developed countries, where health authorities are much closer to vaccination goals and allow economies to be further opened to trade.
South Africa, which only got its first million vaccinations this week, ranks second out of 29 countries tracked by Fathom Consulting on Refinitiv Datastream, 39 million behind its 60% target.
The Rand’s 8% year-to-date gains clearly top an EM list of 20 currencies tracked by Reuters – despite much slower vaccine launches – followed by the Chinese yuan at around 2%. China administered 20.4 million doses on June 1 alone.
The high yield rand rebounded to / $ 13.50 on Thursday, trading at its strongest level since early February 2019.
However, the poll median for the rand sees a correction of about 5% to $ 14.35 in 12 months, while the median suggests the yuan will gain over half a percent to $ 6.35 in 12 months becomes.
The People’s Bank of China (PBOC) has a carefully managed system of floating exchange rates, and as a warning to speculators this week, the PBOC increased its foreign exchange reserve requirements with Chinese banks to curb a yuan from a three-year high against the dollar.
(Reporting by Vuyani Ndaba, additional reporting by Gabriel Burin, survey by Shaloo Shrivastava and Manzer Hussain; editing by David Gregorio)
This article originally appeared on www.oann.com