Analysis: Investors look to emerging markets as planets align for end of dollar bull market

Analysis: Investors look to emerging markets as planets align for end of dollar bull market

NEW YORK, Dec 6 (Reuters) – As the U.S. dollar tumbles from multi-decade highs, some investors are betting emerging market currencies will be the big winners from a sustained reversal in the greenback.

The MSCI International Emerging Market Currency Index (.MIEM00000CUS) is up nearly 5% from its lows and posted its best monthly gain in about seven years in November, as expectations that the Federal Reserve will slow soon the pace of its interest rate hikes supported the case for investors betting on emerging market currencies.

Signs of a broader reversal in dollar sentiment can be seen in the dollar’s 8% decline against a basket of developed market currencies from its September highs. In futures markets in November, speculative traders took a net short position in the US dollar for the first time in 16 months, according to Reuters calculations based on data from the US Commodity Futures Trading Commission.

“The planets are lining up for a dollar bear market,” said Paresh Upadhyaya, director of fixed income and money strategy at Amundi US.

Emerging market currencies have outperformed their developed market counterparts this year, with the MSCI Emerging Market Currency Index down 5% year-to-date, while G10 dollar peers have lost nearly the double.

Emerging currencies rebound

In addition to the possibility of a slowdown in Fed hikes, investors cited expectations that China would ease its strict COVID-19 containment policy and the relatively high yields found in many emerging countries as reasons for concern. add positions in emerging market currencies.

Amundi’s Upadhyaya focuses on currencies from high-yielding emerging countries that have balanced current accounts and lower fiscal deficits, including the Brazilian real, Peruvian sol = and Indian rupee.

Some emerging markets offer attractive returns even when adjusted for inflation. For example, the inflation-adjusted yield on 10-year US Treasuries is 1.08%, compared to 6.07% for the Brazilian equivalent.


Investors cheered the prospect of a change in China’s COVID-19 policy, after rare street protests increased pressure on officials to relax some rules. China – the world’s second-largest economy and a key consumer of raw materials produced by many emerging nations – is expected to announce further easing of its COVID restrictions as early as Wednesday, sources said.

The Chinese yuan has been up about 5% against the dollar since late October and on Friday posted its best weekly performance against the US currency in at least two decades, while the Hang Seng index rose 27% in November, its best month since October 1998.

“I think the cat is out of the bag. They can’t go back to their purely restrictive zero COVID policy,” said Jack McIntyre, portfolio manager at Brandywine Global.

McIntyre increased its exposure to some Asian currencies, including the Thai baht and the Malaysian ringgit. The Thai currency rose 8% in November, while the ringgit appreciated 6%.

Some investors believe it may be too early to bet on a sustained reversal in the dollar. While Fed Chairman Jerome Powell said last week it was time to slow the pace of upcoming interest rate hikes, the central bank could raise rates more than expected as it struggles against the worst inflation in decades.

Meanwhile, signs of lingering inflation in next week’s U.S. consumer price data could reignite bets on Fed hawkishness and boost the dollar.

Investors generally expect the Fed to raise rates by 50 basis points next week, following a string of 75 basis point rate hikes.

Conversely, tighter central banks around the world also risk triggering a global recession, a scenario that some believe could hurt emerging market currencies and help the dollar.

A global slowdown “would create safe-haven supply and limit the ability of most cycle-sensitive currencies to rally against the dollar,” said Aaron Hurd, senior portfolio manager, currencies, at State Street Global Advisors.

Others, however, are betting that China’s reopening bodes well for some emerging market currencies.

Carlos Fernandez-Aller, head of Global FX and EM Macro trading at Bank of America, sees a possible reopening of China boosting the Thai baht, which he says will benefit from an increase in tourism.

Analysts at Societe Generale, meanwhile, said an easing of China’s COVID restrictions could support the South African rand, forecasting an 18% gain in total return for the currency exporter of raw materials next year.

“Improving fundamentals, valuations and technicals all point to stronger emerging market performance over the next year,” they wrote in a recent report.

Reporting by Saqib Iqbal Ahmed in New York Additional reporting by Davide Barbuscia in New York Editing by Ira Iosebashvili and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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