According to a recent Reuters poll of currency analysts, emerging market currencies are expected to face challenges in rebounding this year. The U.S. Federal Reserve’s reluctance to cut interest rates, along with the outcome of crucial national elections, are likely to exert pressure on these currencies. The survey, conducted from May 31 to June 4 and involving over 50 foreign exchange strategists, indicates that most emerging market currencies are predicted to weaken or trade within a limited range in the next three to six months, primarily due to the strength of the U.S. dollar. Although there has been a slight uptick in emerging market assets following weak U.S. data suggesting a potential interest rate cut by the Fed in September, the overall global outlook and the outcome of significant elections will continue to play a crucial role in determining the performance of emerging market currencies. Nevertheless, U.S. policymakers have refrained from disclosing a precise timeline for policy easing, making it unlikely that emerging market currencies will experience a significant surge in the near future.
“We anticipate that most emerging market currencies will maintain stability in the coming month, although many may still face pressure until there is a decline in U.S. yields,” stated Ruben Gargallo Abargues, an assistant economist at Capital Economics.
“We maintain our belief that the dollar will remain strong for the next few months, until inflationary pressures ease and the Federal Reserve shifts towards cutting interest rates.”
Recent elections in India, South Africa, and Mexico have occurred, contributing to volatility in emerging markets as investors analyze the implications of these outcomes on future economic reforms.
Over the next three to six months, it is expected that the Indian rupee, Korean won, and South African rand will trade within a narrow range, while the Russian rouble and Turkish lira are projected to weaken by over 5%.
Mexico witnessed a historic event with Claudia Sheinbaum becoming the country’s first female president, while the African National Congress in South Africa experienced its most significant electoral setback in three decades.
The Mexican peso reached its lowest point against the dollar since November on Tuesday, following the anticipation of the ruling party gaining a super-majority in Congress. This outcome has raised concerns in the market about potential constitutional changes and a reduction in checks and balances.
However, Barclays analyst Erick Martinez believes that the impact on the peso will be temporary. He expects that once the initial uncertainty subsides, markets will analyze the situation and assess what is feasible and what is not. Martinez also points out the strong economic ties between Mexico and the United States, suggesting that global factors will continue to play a significant role in trading activities.
Meanwhile, in South Africa, investors are eagerly awaiting the announcement of potential coalition partners by the African National Congress (ANC). The ANC has a wide range of parties to choose from, spanning from Marxists to advocates of free markets.