POLL-No peace for emerging market currencies as the mighty US dollar rules

Band Vuyani Ndaba and Vivek Mishra

JOHANNESBURG/BENGALURU, April 8 (Reuters)Most emerging market currencies will continue to struggle against the mighty dollar in the coming year as the US Federal Reserve finally delivers the expected aggressive policy tightening, according to a Reuters poll of FX strategists.

Central banks in emerging economies have been preparing for this for months by raising their benchmark interest rates. But the actual timing of the Fed making half-point rate hikes and rapidly shrinking the balance sheet still matters.

Minutes from the Fed’s March meeting showed officials generally agreed to trim the central bank’s balance sheet by $95 billion a month, giving a major boost to the already rising greenback.

The latest Reuters poll of more than 50 currency strategists showed nearly all currencies in developing markets will weaken over the next 12 months.

Even currencies that have been driven higher by the ongoing commodity cycle and policy tightening by their respective central banks, such as the Brazilian real BRL= and the South African rand ZAR=D3had to give up about half of those gains in a year.

These currencies have gained around 18% and 9% respectively so far in 2022.

The Mexican peso – a classic currency hedge of emerging markets – is expected to lose more than three times its gains for this year in 12 months.

“In the face of impending big Fed hikes and rapidly rising US yields, the resilience of EMFX remains somewhat surprising,” noted Paul Meggyesi, head of FX strategy at JPMorgan.

“A particular risk for EMFX is that as the Fed begins to raise rates, a further rise in US yields could be driven primarily more by real yields than break-even inflation.”

Meggyesi added that this has always been negative for emerging market currencies.

While most emerging market currencies managed to escape the onslaught of Fed policy tightening relatively unscathed, the Russian ruble and Turkish lira were notable exceptions.

The rouble, which halved last month to an all-time low of 150 to the dollar after Russia invaded Ukraine, is expected to weaken more than 15% to 94.2 to the dollar in one year against 78.5 currently.

The Russian currency is driven by export-oriented companies selling foreign currency and low activity by importers. But analysts have warned that the ruble’s recent rally will not last.

“(The recent gain) is not an accurate reflection of the fundamental situation in Russia. The economy is expected to contract very sharply and inflation will become higher, which in the longer term should be more consistent with a weaker rouble,” said Lee Hardman, currency analyst at MUFG.

Hardman said the situation for the Turkish lira was not much different.

“They (the government) are stepping in to support the pound but they’re not taking the kind of drastic measures like capital controls that we see in Russia.”

The lira, which weakened 44% last year, is expected to plunge another 15% to 17.27 to the dollar in a year as it grapples with runaway inflation that hit a 20-year high. years of 61.14% in March.

The tightly controlled Chinese yuan is expected to depreciate 1.4% to 6.45 per dollar in a year, as analysts warned that a narrowing yield spread between Chinese and US 10-year government bonds could trigger outflows of capital.

Elsewhere in Asia, the Philippine peso and Indian rupee are expected to weaken between 1% and 3%.

(Reporting by Vuyani Ndaba in JOHANNESBURG and Vivek Mishra in BENGALURU; Polling by Devayani Sathyan and Md Manzer Hussain; Editing by Ross Finley and Bernadette Baum)

(([email protected]; Twitter: https://twitter.com/Reuters_Vivek))

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