Silver lining for emerging FX: little room to fall more

September 4, 2015

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If there is any silver lining for emerging market currencies after their thrashing in August, it is that they are probably now so cheap they don’t have much room to weaken any further.

At least that was the consensus view of over 150 foreign exchange strategists polled by Reuters this week, in which they predicted almost every major emerging market currency from Latin America to Central Europe, through Africa and on to Asia would gain in twelve months’ time.

The Chinese yuan and South Korean won were the only two currencies predicted to weaken in a year.

Although a reprise of last month’s financial market sell-off, triggered by China devaluing its currency and cutting interest rates to support a weak economy, is not completely ruled out. 

And if that happens, the Brazilian real and Turkish lira were singled out as the two currencies most prone to a repeat sell-off, while the Czech koruna and Hungarian forint were seen as the least likely to be affected.

Strategists in the poll listed China’s slowing economy and faster-than-expected interest rate hikes in the U.S. as the two biggest risks for emerging market currencies.

If the Federal Reserve hikes rates in a couple of weeks, as some economists still predict, that will light a fire under the dollar rally and thwart any sharp rise in emerging currencies.

And if the Chinese growth weakens further, even after the massive policy stimulus from the government and its central bank, investors could flock out of emerging market assets, beating many of those currencies lower.

Still, after a month in which currencies, stocks and commodities were thrashed and plummeted to – in some cases – record lows, analysts signaled some calmer days ahead.

Revised

  (With additional inputs by Rahul Karunakar)

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