EM Currencies Expected to Remain Stable or Reduce Gains Through 2024

By Devayani Sathyan and Vuyani Ndaba

BENGALURU/JOHANNESBURG – Emerging market currencies are anticipated to trade within tight ranges or experience some retracement of their year-to-date gains over the next three months, following the U.S. Federal Reserve’s decision to temper expectations for aggressive rate cuts, according to a recent Reuters poll.

After grappling with significant losses last year and in the first half of 2024, emerging market currencies have seen noticeable appreciation against the dollar in recent weeks—this follows a 50 basis point reduction in U.S. borrowing costs by the Fed.

However, the upward momentum of these currencies appears to be waning after Fed Chair Jerome Powell suggested that the central bank is likely to implement smaller, quarter percentage-point cuts in the future. Coupled with rising geopolitical tensions, this shift has pushed investors to favor the safe-haven dollar over riskier emerging markets.

The broader foreign exchange poll indicated that the dollar is expected to remain stable in the coming months. Most emerging market currencies are projected to experience limited movement or slight declines within the next three months, based on a survey of 59 foreign exchange strategists conducted from September 30 to October 3.

"We are not expecting…any further major gains in the EMFX spot versus the dollar. We anticipate a relatively even mix of winners and losers against the dollar by year-end," stated Phoenix Kalen, global head of emerging markets research at a prominent financial institution. "We don’t think the Fed funds path will climb much higher from here, so that limits the potential upside for the dollar. However, it’s also unlikely to decrease significantly."

The Thai baht and Malaysian ringgit are predicted to weaken by 1.2% to 2.0% in the coming three months, while another currency is expected to depreciate nearly 5%.

Concerns regarding the Chinese yuan losing all of its gains for the year align with the People’s Bank of China’s announcement of substantial stimulus measures aimed at propelling the economy towards the government’s 5% growth target and combating deflation pressures. A surge in Chinese growth, as it is a major trading partner for many nations, would provide significant support to emerging market currencies.

Median estimates suggest that the Indian rupee will hover around 83.73 per dollar within three months, showing little change from previous predictions. The South African rand is projected to weaken by about 1% against the dollar during the next quarter, although it has gained approximately 8% in the past six months following the country’s elections in May.

"We remain somewhat cautious about emerging market currencies heading into next year due to the potential for a dollar recovery. However, we are closely monitoring developments in China and its stimulus measures, and their impact on the global commodities market," remarked Mitul Kotecha, head of FX and emerging market macro strategy at another leading financial institution.

"The key factor to watch is the upcoming U.S. elections, which could introduce a level of caution as we approach November," Kotecha added.