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Investors Bet on Emerging Markets as Dollar Bull Run Nears Its End

Emerging market currencies have outperformed their developed market counterparts this year.

New York:

As the US dollar continues to slide from multi-decade highs, some investors are betting that emerging market currencies will be big winners from continued reversals in the greenback.

The MSCI International Emerging Market Currency Index is up nearly 5% from its lows and posted its best monthly gain in nearly seven years in November as the Federal Reserve is expected to soon slow the pace of its interest rate hikes. The speculation case of investors got strengthened. on emerging market currencies.

The dollar declined 8% against a basket of developed market currencies from September highs, showing signs of a broader shift in dollar sentiment. In November futures markets, speculative traders turned to net short positions on the US dollar for the first time in 16 months, according to a Reuters calculation based on data from the US Commodity Futures Trading Commission.

“The planets are ready for a dollar bear market,” said Paresh Upadhyay, director of fixed income and currency strategy at Amundi US.

Emerging market currencies have outperformed their developed market counterparts this year, with MSCI’s emerging market currencies index down 5% year-to-date, while the dollar’s G10 peers nearly doubled losses Is.

In addition to the prospect of a slower Fed hike, investors cited expectations that China will loosen its strict COVID-19 containment policy and comparatively richer yields in many EM countries as reasons to add to positions in emerging market currencies. .

Amundi’s principals are focusing on currencies of high-yielding emerging market countries with balanced current accounts and small budget deficits, including the Brazilian real, the Peruvian sol = and the Indian rupee.

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

china watch

Investors have cheered the prospect of a change in China’s COVID-19 policy, after a rare street protest mounted pressure on authorities to ease some rules. Sources said China – the world’s second largest economy and a major consumer of goods produced by many emerging market countries – is set to announce further easing of its COVID restrictions as early as Wednesday.

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

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

McIntyre is raising risk exposure to some Asian currencies, including the Thai baht and the Malaysian ringgit. Thailand’s currency gained 8% in November, while the ringgit gained 6%.

Some investors feel it is too early to bet on a sustained reversal of the dollar. While Fed Chair Jerome Powell said last week it was time to slow the pace of incoming interest rate hikes, the central bank may raise rates more than previously estimated as it battles the worst inflation in decades.

Also, signs of stubborn inflation in next week’s US consumer price data could bet on Fed hawkishness and boost the dollar.

Investors broadly expect the Fed to raise rates by 50 basis points next week, following a 75 basis-point rate hike.

Conversely, tightening by central banks around the world also raises the risk of a global recession, a scenario some believe could hurt emerging market currencies and help the dollar.

Aaron Hurd, senior portfolio manager, currencies, at State Street Global Advisors, said a “global recession” would create a safe haven bid and limit the upside potential of most cycle-sensitive currencies against the dollar.

Others, however, are betting on signs of China’s reopening for some emerging-market currencies.

Carlos Fernandez-Eller, head of global FX and EM macro trading at Bank of America, sees a possible China reopening to the Thai baht, which he believes would benefit from increased tourism.

Meanwhile, analysts at Societe Generale said China’s easing of COVID restrictions could buoy the South African rand, forecasting an 18% gain in total return terms for the commodity exporter’s currency next year.

“Improving fundamentals, valuations and technical factors argue for strong EM FX performance next year,” they wrote in a recent report.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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