Sagging EM Currencies Won’t Recover Until Next Year

Emerging-market currencies are unlikely to rebound from this year’s downturn until 2019, as rising trade tensions and the prospect of higher interest rates in major economies curb investor appetite for risk, a Reuters poll found on Thursday.

Among 32 foreign exchange strategists polled in the past week, 13 said the search for yield could become a driving factor for currency trades once again in six to 12 months. Seven said it would take more than a year.

Emerging-market currencies have been weakened by a stronger dollar most of this year. The Argentine peso and Turkish lira, for example, have both lost more than 40% in value in the past six months.

However, South Africa’s rand is expected to gain over 2% to 13.05 and the oversold and extremely volatile lira by around 3.5% to 5.10.

“I do not think that emerging markets in general will broadly recover in the second half of the year, as the outlook is still so uncertain,” said Christopher Shiells, emerging market analyst at Informa Global Markets.

Trade tensions between the world’s two biggest economies, the United States and China, weighed heavily on emerging market currencies that rely on inflows to close the gap on deficits created by higher imports over poor exports.

Turkey’s lira and Chinese shares—the two main pressure points for emerging markets in recent months—were dragged back into the red on Wednesday by souring relations with the United States.

Investors have had concerns over Turkey, most worried by what they see as President Recip Tayyip Erdogan’s grip on the central bank, which has not been as aggressive in raising interest rates as many investors thought would be the case.

Manufacturing Purchasing Managers’ Indexes are pointing to a broader emerging-market slowdown, and another blow-up in the Turkish lira and political risk increasing in South Africa has led to contagion concerns, Shiells said.

South Africa’s rand began the year on optimism that incoming President Cyril Ramaphosa would be friendlier to markets and business. But economic growth has been disappointing since then.