China's reopening set to help EMFX get back on track: Reuters poll

© Reuters. FILE PHOTO: Travellers walk at a terminal hall, during the annual Spring Festival travel rush ahead of the Chinese Lunar New Year, in Beijing Capital International Airport, Beijing, China January 18, 2023. REUTERS/Tingshu Wang/File Photo

By Vuyani Ndaba and Vivek Mishra

JOHANNESBURG/BENGALURU (Reuters) - China's reopening is set to boost emerging market currencies against the U.S. dollar over the next six months, primarily for those that export commodities to the world's second-largest economy, a Reuters poll of foreign exchange analysts found.

Investor confidence towards emerging market assets has risen since China dropped its pandemic-era zero-COVID policy late last year but worries that the U.S. Federal Reserve has quite a bit more tightening in store have put a damper on sentiment.

Emerging markets face the significant risk of an extended series of Fed interest rate hikes and a strengthening dollar, both of which increase the burden of hard-currency denominated debt and lead to tighter financial conditions.

But China's reopening is expected to stimulate domestic consumption and tourism, which would benefit its neighbours in North and Southeast Asia, as well as various emerging economies that rely on commodity exports.

Despite the threat posed by higher U.S. yields in recent weeks, the MSCI Emerging Markets Currency Index remains almost 3% below its early February peak, as dollar bulls have reemerged.

"China's re-opening should drive stronger EM growth relative to the U.S.," noted Mikhail Liluashvili, strategist at Bank of America (NYSE:BAC).

"Hard landing risks remain with us, but timing it is tricky as global growth has been surprising to the upside. In this environment, it is better to avoid direct USD exposure."

After a good start to the year for emerging market forex, the U.S. dollar has risen nearly 4% from its recent lows on rate differential support.

So long as U.S. inflation keeps drifting lower, however, strategists forecast emerging market currencies will perform better than majors, although not in a straight line upward in the near term.

"USD strength can persist for a bit longer, as the market tries to navigate the balance of global growth recovery and higher rates," wrote Mark McCormick (NYSE:MKC), global head of FX strategy at TD Securities.

GROWTH TARGET

"(But) we continue to see few catalysts in the very near-term that could turn the narrative, though keep an eye on the upcoming China data dump."

China may set an economic growth target as high as 6% in a bid to boost investor and consumer confidence and build on a promising post-pandemic recovery, according to sources involved in policy discussions.

After falling about 8% last year, China's tightly controlled yuan was predicted to appreciate only around 4% to 6.67 per dollar in a year.

But analysts said the direction of the yuan will partly depend on the annual meeting of the National Party Congress, slated to begin this Sunday. Investors are watching for any further government measures to stimulate economic recovery.

Analysts in the poll said commodity currencies are also expected to appreciate due to China's economic reopening.

The Russian rouble is predicted to gain about 2.0% to 74.1/$ in six months, with the Canadian, Australian and New Zealand dollars forecast to rise 3.2%, 5.4%, and 3.0%, respectively.

South Africa's rand, a high-yielder, which has lost over 6% so far this year, was expected to gain about 3% in the next six months to 17.67 per dollar.

Mexico's peso, closely linked to the prospects of the U.S. dollar, and the Turkish lira, are the only two emerging market currencies covered by the poll expected to weaken. [BRL/POLL]

The lira, the worst-performing emerging market currency last year, is set to fall about 12% to 21.68/$ in the next six months.

"A lack of an independent central bank and an unorthodox view on monetary policy should keep the lira on a weakening trend against the greenback for the foreseeable future, unless the presidential election this May results in regime change," said Brendan McKenna, international economist at Wells Fargo (NYSE:WFC).