Emerging market currencies to gain steadily in the near-term: Reuters poll

By Devayani Sathyan and Vuyani Ndaba

BENGALURU/JOHANNESBURG (Reuters) - Most emerging market currencies will struggle to recoup this year's losses against the dollar in coming months as expectations for aggressive rate cuts from the U.S. Federal Reserve diminish, a Reuters poll of FX strategists found.

After ending 2023 on a positive note, the rally in the emerging market currency basket has ran out of steam and was down 1.2% for the year, hurt by higher U.S. Treasury yields.

Better than expected U.S. economic data and hawkish comments from Fed policymakers have led investors and markets to roll back on rate cut predictions, pushing the dollar index up 3% in only a few weeks.

In the Feb. 2-6 Reuters poll of 50 FX strategists, almost all emerging market currencies were expected to barely recoup year-to-date losses six months from now.

"The rally we had been anticipating especially out of currencies and rates has already materialized. Emerging market currencies are relatively very fairly priced...and we're not expecting for them to appreciate much," said Phoenix Kalen, global head of emerging markets research at Societe Generale.

"The Fed rate cuts are already well priced and the consequences of U.S. exceptionalism are still unfolding and that's going to have positive implications for the dollar index and negative implications for EM currencies."

While the Indian rupee was predicted to gain only around 0.6% by end-July, the Thai baht and South Korean won which lost 3.4% and 2.5% respectively this year were predicted to gain around 3.5% in the next six months.

While EM currencies were largely dependent on the global interest rate cycle mainly led by the Fed, growth headwinds in China remain a key obstacle on their performance.

The Chinese yuan was forecast to just recoup its 1.3% losses so far this year in the next six months.

South Africa's rand was expected to gain around 2.3% to 18.41/$ in six months as it catches up to broad EM gains, but that would still not wipe out the fall of almost 7% last year.

Goldman Sachs wrote in a note the rand offers one of the most attractive combinations of value and real carry, supported by more benign inflation forecasts.

However, it remains one of the most dollar-sensitive EM currencies, which makes the risk-reward less compelling under its baseline trajectory of more gradual broad dollar depreciation.

The Russian rouble is expected to lose nearly 2% to 92.28/$ while the Turkish lira will weaken over 9% to 33.67/$ in the next six months.

(For other stories from the February Reuters foreign exchange poll:)

(Reporting by Devayani Sathyan and Vuyani Ndaba; Polling by Veronica Khongwir and Anant Chandak; Editing by Ross Finley & Shri Navaratnam)