EM currencies are set to hold steady gains or reduce for the remainder of 2024

By Devayani Sathyan and Vuyani Ndaba

BENGALURU/JOHANNESBURG (Reuters) – Most emerging market currencies are set to trade in tight ranges or pare some of year-to-date gains over the next three months after the U.S. Federal Reserve scaled back expectations for aggressive rate cuts interest rates, according to Reuters. survey.

After suffering significant losses last year and in the first half of 2024, emerging market currencies have made notable gains against the dollar in recent weeks after the Fed cut borrowing costs by 50 basis points.

However, the rally in emerging market currencies is coming to an end after Federal Reserve Chairman Jerome Powell indicated that the US central bank is likely to maintain interest rate cuts of a quarter of a percentage point going forward.

Rising geopolitical tensions have also steered investors toward the safe-haven dollar and away from risk-prone emerging markets.

The broader currency survey expected the dollar to hold steady in the coming months.

Most emerging market currencies were forecast to trade in a range or weaken slightly over the next three months, according to the Sept. 30-Oct. 3 survey of 59 foreign exchange strategists.

“We don’t expect … any further major gains in spot EMFX against the dollar. We expect a relatively even mix of winners and losers against the dollar through the end of the year,” said Phoenix Kalen, global head of emerging markets research. at Societe Generale (OTC:).

“We don’t think the Fed funds path is going to go much higher from here, so that limits the dollar’s tailwind. But at the same time, it is unlikely to decrease.”

The Thai baht and Malaysian ringgit are expected to lose 1.2% to 2.0% over the next three months. it was forecast to weaken by almost 5.0% by then.

Expectations for the yuan to shed all of its year-to-date gains in the next three months coincide with the People’s Bank of China’s unveiling of its most substantial post-pandemic stimulus, which aims to steer the economy toward the government’s 5 percent growth target and beyond of deflation. .

A pickup in growth in China, a significant trading partner for many nations, would greatly benefit emerging market currencies.

Median estimates showed the Indian rupee trading at 83.73 per dollar in three months, little changed from last month’s prediction.

The South African rand was expected to weaken by almost 1% to the dollar over the next three months. It gained about 8% in the last six months after the May election.

“For now we’re a bit cautious on EMFX next year because of the potential recovery in the dollar, but at the same time we’re keeping an eye on what’s happening in China and the stimulus measures there and how that affects the global commodity space,” he said. Mitul Kotecha, Head of FX & EM Macro Strategy at Barclays.

“The big caveat is that there’s an election coming up in the US, and that might be something that gives us just a degree of caution as we go into November.”

(Other stories from October’s Reuters currency survey)