POLL-Partial recovery in a year only solace for beaten-down emerging FX

Credit: REUTERS/THOMAS WHITE

By Vuyani Ndaba, Vivek Mishra and Gabriel Burin

JOHANNESBURG/BENGALURU/BUENOS AIRES, April 3 (Reuters) - Crippled emerging market currencies will find it difficult to reclaim ground lost so far in 2020 but some are set to pare losses by this time next year if the lethal COVID-19 pandemic subsides, a Reuters poll of strategists found.

A global stampede into safe-haven U.S. dollars pushed MSCI's Emerging Markets Currency Index to its lowest level in more than three years on March 23. The Brazilian real, the South African rand and the Indian rupee have hit all-time lows, down 30%, 33% and over 7% year to date, respectively.

A rush for the U.S. dollar in emerging markets that started last month, both panic buying as well as companies needing urgent cash financing, is set to continue dominating local currencies and challenging monetary authorities in coming weeks.

The downward pressure has little chance of receding in the near-term as the virus, which originated in China, stormed through Asia, Europe and the United States, is only just starting to spread in major emerging market countries.

"The shock to the global economy from the coronavirus pandemic is likely to be even sharper than the contraction in 2008. While the worst may be yet to come for emerging market currencies, we expect that most will end this year stronger than they are now," said Jonas Goltermann, senior markets economist at Capital Economics.

"But if, as we expect, the spread of the virus in Europe and the U.S. is brought under control soon, the rebound should be faster too."

In the March 27-April 2 poll, almost all beaten-down emerging market currencies were forecast to trade higher against the dollar in a year from now, with some making small gains in six months.EUR/POLL

"We continue to warn that dead cat bounces – even very large ones – is a normal feature of crisis price action," said Jason Daw, head of emerging markets strategy at Societe Generale.

"The best medical professionals in the world don't seem to have a good handle on how the virus will evolve across countries and when the pandemic will end. The implication for EM FX is clear – it is a risk off market, until it isn't, and bottom fishing has poor risk-reward."

The Chinese yuan, the most actively-traded emerging market currency but also tightly-managed by its local authorities, was predicted to gain over 1% to 6.99 per dollar in 12 months time. It was trading around 7.09 on Thursday, down 2% this year.

For free-floating currencies, the recent falls have been much more brutal.

Brazil's real is predicted to gain almost 15% in a year's time, followed by the South African rand and Russian rouble, both expected to recover around 10%. However, the Turkish Lira is forecast to extend losses, falling more than 2% to 6.8 per dollar by this time next year. L4N2BQ20O

The U.S. Federal Reserve on March 31 broadened the ability of dozens of foreign central banks to access U.S. dollars by allowing them to exchange holdings of U.S. Treasury securities for overnight dollar loans.

"It is true that some of the largest foreign holders of Treasuries are EM central banks who are under FX depreciation pressures and they may be being forced to sell their holdings of U.S. Treasuries to defend their currencies," said Jahangir Aziz, head of emerging markets economics at JP Morgan.

"This repo facility gives an additional tool for EM central banks - it is unlikely to be a game changer for many EM currencies."

CENTRAL BANKS HAVE LIMITED CONTROL

Nearly two-thirds of foreign exchange strategists, 29 of 45, who answered an additional question said emerging market central banks as a whole would not be successful in fully countering losses in domestic foreign exchange markets.

"Accommodative central bank policies are a necessary but not sufficient means to reduce currency weakness given an intense flight to safety and funds departing risky assets," said Emile Du Plessis, an economist at Finometrica in Johannesburg.

Meanwhile, other risks are appearing on the horizon. In Brazil, the central bank called last week for emergency powers with a draft constitutional amendment allowing it sweeping purchases of "public or private financial assets".

This could open the door for broader implementation of a central bank bond-buying program, or quantitative easing, a strategy that could weigh on the real if newly-created cash floods the country's financial system.

The South African Reserve Bank last week launched a bond-buying programme, seeking to drum up demand in credit markets as the coronavirus epidemic weighs on the country's already ailing economy. The SARB has long resisted public and political pressure to intervene more directly to stimulate activity.

(Polling by Khushboo Mittal, Sujith Pai and Indradip Ghosh Editing by Ross Finley and Alexandra Hudson)

((vuyani.ndaba@thomsonreuters.com; +27 11 775 3157;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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