By Vuyani Ndaba
JOHANNESBURG (Reuters) – Sentiment for emerging market currencies this year will continue to jump when there is positive U.S.-China trade war news, but risks such as South Africa’s debt problems and Turkish confidence will weigh on gains, a Reuters poll found on Friday.
Investors are hard pressed to find good returns in an environment of low interest rates but will keep looking to emerging markets while staying wary of sink holes in economic fundamentals.
The survey, taken this week, found 43 of 46 strategists saying sentiment for emerging market currencies for the rest of this year would be dominated by global factors.
Analysts also lowered their outlook for most emerging market currencies from a survey conducted a month ago.
“We expect rallies to prove short-lived, however, and in the very near-term see the rand underperforming high-yielding peers like the lira,” wrote Nikolaos Sgouropoulos, strategist at Barclays.
The Turkish lira has already experienced this trend of short bursts in strength against the dollar despite confidence about its central bank independence and Ankara’s fractious diplomatic relations with the United States.
After losing nearly 8% already this year, the lira is now predicted to shed another 10% in the next 12 months.
Barclays strategists wrote that, away from Brexit, the key driver of their near-term forecasts, particularly for emerging markets, was an at least temporary improvement in the trade outlook.
Both the United States and China appear to have taken steps to de-escalate rhetoric and actions that unnerved markets and policymakers throughout the (northern hemisphere) summer, the note continued.
Still, the South African rand <ZAR=D3> is expected to make modest gains in a year compared to what it has lost since the start of the year, trading in a choppy narrow range in coming months amid some game-changing risks.
The poll also found an almost even split between strategists on whether local and global factors would drive sentiment for the rand this quarter.
South Africa’s National Treasury is due to review finances from its February budget statement that showed a stark deterioration in shortfalls. It was expected to widen markedly before narrowing in three years, in part due to power utility Eskom.
The utility supplies more than 90% of power in Africa’s most industrialised economy but has been grappling with cashflow and high debt problems, with a hefty bill backed by the Treasury, putting credit ratings agencies on high alert.
Francesca Beausang at Continuum Economics said the focus in the next few months would be the Medium-Term Budget Policy Statement, the Moody’s ratings decision on Nov. 1 and the presentation of a plan for Eskom and structural reforms.
Still, popular emerging market currency trades for investors like the Brazilian real <BRL=> and Hungary’s forint <HUF=> have fluctuated between 5-10% losses this year, characterised by rallies that have little strength in times of heightened risk aversion.
“U.S.-China trade remains the main driver for most emerging market currencies, as well as the Fed outlook beyond insurance cuts,” said Beausang.
Last month, the U.S. Federal Reserve voted to cut borrowing costs by a quarter of a percentage point to a range of 1.75% to 2.00% after a similar cut in July.
But Barclays strategists wrote that the medium-term outlook for emerging market (EM) currencies remains poor.
“We believe the relief in U.S.-China trade tensions is temporary and likely to inflame again next year. More structurally, we are concerned about EM’s growth model,” they said.
Further deterioration in U.S.-China trade relations would also threaten gains in other emerging market currencies.
The Chinese yuan will slip by year-end to deeper lows last hit against the U.S. dollar during the 2008 global financial crisis, a separate Reuters poll showed. [CNY/POLL]
(Polling by Richa Rebello and Sarmista Sen in Bengaluru)