By Vuyani Ndaba
JOHANNESBURG (Reuters) – Emerging market currencies will find support from higher commodity prices and domestic vaccination rollouts this year, despite turbulence in U.S. Treasury yields that could diminish their appeal, a Reuters poll found.
Just last week Treasury yields in the United States rose again as traders and investors inferred the Federal Reserve’s tone in last month’s policy meeting was a start to discussion on tapering the bond buying programme, sapping emerging market gains after good a run in April.
Still, the emerging markets currency index, heavily weighted toward China given the size of its economy, has more than reversed 2020 losses.
In the May 3-5 Reuters poll, nearly two-thirds of 40 strategists polled said currencies linked to commodity-exporting nations would perform better against the dollar over the next 12 months than strictly high or low yielding emerging market currencies.
“Given our generally bullish outlook on commodity for 2021, we expect commodity exporters to remain supported, in both EM and DM (developed markets), even in the face of a stronger DXY,” noted FX analysts at Citi.
“These currencies will also generally be aided by the rates divergence trade.”
Reuters poll graphic on emerging market currencies outlook – https://fingfx.thomsonreuters.com/gfx/polling/gjnpwngdyvw/Reuters%20poll%20graphic%20on%20EMFX%20outlook.PNG
In response to an additional question, more than two-fifths of 47 analysts said sentiment for emerging market currencies for this year would be dominated by the pace of vaccine rollouts domestically, followed by risk-reversals with regards to U.S. Treasuries and increasing new cases and variants of COVID-19.
COMMODITY PRICES
The Chinese yuan, the most actively traded emerging market currency, was predicted to gain almost 1% to 6.43/$ in six months’ time, while India’s rupee, hit by a surge in coronavirus infections, was expected to slip over 0.7% to 74.5/$.
The rand was expected to weaken almost 3% to 14.89/$ in six months, after performing best among emerging markets tracked by Reuters in the past quarter. The Mexican peso will firm slightly to 20.15/$ by 0.4%.
“South Africa and Mexico represent the EM proxies for European and U.S. investors, so to get them stronger than their long-term average would take a considerable rise in EM bullishness,” wrote Charles Robertson, head of macro strategy at Renaissance Capital.
“This is plausible on rising commodity prices pulled by China. South Africa’s and Mexico’s rates are low which doesn’t help, but if U.S. 10-year yields drop back from 1.6% to 1% and commodity price trends remain helpful, we’d be tempted to revise our end-year rand forecast from 14/$ to 13/$.”
Goldman Sachs analysts said: “One way for EM investors to manage a rise in U.S. yields is to lean into commodity exposures.”
Copper prices climbed back towards 2021 highs recently, supported by prospects for higher demand while commodity exporting companies keep reporting better production and profit expectations in South Africa due to much better returns from selling raw materials abroad.
Still, fears of inflation in the United States have in part driven higher treasury yields which have competed with emerging market currencies’ yield appeal, disrupting healthy EM returns since late last year.
“The Fed beginning the tapering conversation could bring with it upside in U.S. Treasury yields that have proven to be a significant headwind to growth linked/high beta FX, particularly across EM,” said Brian Daingerfield, head of G10 FX strategy at NatWest.
However, some investors do not think the pace of money supply in the United States from stimulus packages means inflation will quicken and trigger the Fed into higher rates, likely benefiting risk taking in emerging market currencies.
(For other stories from the May Reuters foreign exchange poll:)
(Reporting by Vuyani Ndaba and Vivek Mishra; Polling by Khushboo Mittal and Hari Kishan; Editing by Jonathan Cable and Alison Williams)
