JOHANNESBURG (Sept 6): Many emerging market currencies, which have had a torrid few months, will bounce back at least partially against the dollar in a year as weakening growth momentum takes the shine off the greenback, a Reuters poll found.
The rand is expected to firm almost 10% to 14.00 per dollar in a year, the Brazilian real just over 8% to 3.79 per dollar, and the heavily-sold Argentine peso over 10% to 34.135 per dollar.
"At these (current) levels, a lot of the bad news is priced in," said Mike Keenan, a strategist at Absa Capital.
"We think the rand sell-off is probably overdone, even though we acknowledge it is vulnerable to tighter monetary policy conditions globally, twin deficits and an unwind of the carry trade."
Most strategists surveyed in August did not expect such a broad sell-off for the likes of the rand and the real so soon — or one of such ferocity.
"The move happened much faster than I had anticipated. I expected dollar/rand to trade higher, but those levels (came) sooner than I anticipated," said Piotr Matys, currency strategist at Rabobank.
In the event of a continued sell-off — aside from the Argentine peso and Turkish lira — South Africa's rand and Brazil's real are most at risk, according to a majority of analysts who answered an additional question.
The rand has been resilient most of this year, and during other bouts of selling, compared to other emerging market currencies.
Data triggered more weakness for the rand on Tuesday, however, when the statistics agency confirmed South Africa entered recession in the second quarter for the first time since 2009, a bad start for new President Cyril Ramaphosa.
Last month's Reuters poll indicated emerging-market currencies were unlikely to rebound from this year's downturn until 2019 and that the search for yield was unlikely to be considered a driving factor for currency trades until then.
Analysts said the likelihood the European Central Bank will start to raise rates next year would tilt interest-rate-differential support away from the dollar, triggering a more meaningful pull back for emerging markets.
The storm in emerging markets continued to rage fiercely this week, with the rand in the eye and suffering around a 3% fall on Tuesday. Losses since late January for MSCI's 24-country EM stocks index are nearing US$1 trillion.
The rand clawed back some of its losses on Thursday after data showed South Africa's current account deficit had narrowed to 3.3% of gross domestic product in the second quarter.
"The main focus, I still believe, remains on the global backdrop, on trade tensions between the US and China, on the Fed, and (the) crisis in other emerging markets like Argentina and Turkey," said Matys.
Argentina's government said on Tuesday it hoped the International Monetary Fund would agree later this month to a deal giving the country more financial support as it seeks to escape a deepening economic crisis.
On Monday, President Mauricio Macri announced new taxes on exports and steep spending cuts to eliminate Argentina's primary fiscal deficit next year. The measures are aimed at assuring investors Argentina can pay its debts.
"The issue with Argentina is a crisis of confidence. When you are dealing with such a crisis it is extremely difficult to regain confidence amongst investors," Matys said.
Meanwhile in Turkey, both Moody's and Standard & Poor's ratings agencies cut Turkey's sovereign credit ratings deeper into "junk" territory last month, a development that would have likely worried investors in the broader emerging markets.
The lira is likely to slide further in a year to 6.82 per dollar from 6.50, the poll showed.