In the next few months the currencies of developing countries will continue to rise against the dollar, with the trend strengthening them may even intensify, writing in his review analysts Soсiete Generale (SG) Jason Dawe, Phoenix kalen, Roxanne, Julia and Amit Agrawal. They believe that this trend is due to the behavior of investors in the prevailing low interest rates, buying up higher-yielding assets.
The index of the currencies of developing countries MSCI EM Currency this week reached a maximum of 13 months and for the first time in four years to show growth for the year, says Bloomberg. From the beginning of 2016, the index rose more than 7%.
“In recent years, the currencies of emerging markets hard to ignore all the bad news. Even the decline of the Chinese yuan, which was observed in may—July 2016, has not caused negative reaction of global markets and has no impact on the currencies of developing countries,” analysts say SG.
The fear of investors before the fed rate hike has receded, which also stimulates the inflow of funds to emerging markets. However, analysts believe Soсiete Generale, cycle strengthen currencies of developing countries is nearing completion. “Growth rates have been observed in the last six months, but it is unlikely that this trend will continue over the next year”, — noted in the review. The dynamics can change after the decline in oil prices and due to investor concerns about a slowdown in the global economy. The catalyst for the end of the rally in emerging market currencies could be the beginning of strengthening of the dollar against the currencies of developed countries in the G10.
However, even in this case, emerging-market currencies, analysts say, may behave differently. In particular, currencies of Asian countries (Chinese yuan, Taiwan dollar and Korean won) can show decline, but the currencies of the countries of Latin America and Europe, on the contrary, will be more stable. Russian ruble, Brazilian real and South African Rand can and does show in 2017, rising against the dollar. The dollar, the Bank forecasts that at the end of the year could reach 65 rubles., and in the second quarter of 2017 — to decline to 62 rubles.
To bet on a further strengthening of the ruble, South African Rand and the Turkish Lira also advises the trader FK “Opening” Aram Kazaryan. “The ruble and the Rand will be supported by investor demand for profitable assets. The Turkish Lira also behaves quite stable,” he says. The trader recalled that after the attempted coup in Turkey, the Lira depreciated against the dollar by almost 7%, but then played a large part of the losses. Now the Turkish currency traded at the level of 2.95 liras per dollar a month ago, the exchange rate fluctuated in the area of 2.93 liras per dollar.
“I think the growth rates in emerging markets will continue until the next “black Swan”, but what kind of event, we can only guess,” says Ghazaryan. In his opinion, ” the main risk remains a possible decline in oil prices.
The currencies of developing countries, as well as all types of risk assets will rise this year, says the analyst of investment Department VTB24 Alexei Mikheyev. “We bet on rising prices for oil, metals and other raw materials,” he adds. In his opinion, for the dollar began a period of weakening when it will end, is still unknown. “Investors have growing risk appetite, they do not believe in a rate hike by the fed as the us economy began to show improvement. And the U.S. stock indexes in recent weeks, repeatedly updating the historical highs,” he says. As suggested by Mikheev, the markets are still early in the growth cycle of risk appetite, and all currency will rise further, including the ruble, is at least 10% from current levels.
Investors shift funds into the currency of developing countries with the aim of diversifying risks in case of force majeure in developed markets. “The developed economies have not shown significant growth and at the expense of soft monetary policy barely staying afloat, while developing States are demonstrating a high GDP growth.
Until the end of the year, the downside risks of the European and American economies will remain”, — said the Deputy Director of analytical Department of “Alpari” Anna Kokoreva. According to her, the future of the US economy determines presidential elections and fed policy, and the EU will push Brexit and problems in the banking sector. “While developed countries will begin receiving the first signals that the threat has passed, investments in the currencies of developing countries remains relevant. To invest in the dollar until after the presidential election is premature,” concludes Kokoreva.