March 3, 2020 / 4:30 PM / a month ago

Coronavirus to hit emerging market forex hardest in near term: Reuters poll

JOHANNESBURG/BENGALURU (Reuters) - Fears that the coronavirus may trigger a global downturn will hit emerging market currencies harder than developed markets in the near term as the disease spreads more rapidly outside China, a Reuters poll found.

The polling was conducted before the U.S. Federal Reserve cut interest rates by a half percentage point to 1.00-1.25% in an emergency move, after G7 finance officials also said on Tuesday they were ready to use all policy tools to safeguard against risks to growth.

Many analysts had expected such a move to take place later this month at the Fed’s policy meeting and those expectations helped most emerging market currencies to recover slightly from the deep sell-off in February.

But a majority of currency market strategists polled Feb. 28-March 3 expressed caution and did not expect that trend to last amid rising fears of a global recession from the worsening health crisis.

South Africa's rand ZAR= is forecast to remain weak at 15.40 per U.S. dollar in 12 months after its economy was confirmed to already be in recession. The Turkish lira TRY= is expected to fall about 5% to 6.47 per dollar in the same period.

Indeed, more than three-quarters of foreign exchange strategists, 37 of 47, who answered an additional question said emerging market currencies are set to be hit harder than developed markets at least over the next three months.

“We are heading into what looks to be a synchronized global recession, which is always terrible for emerging markets and seeing people return for more safe-haven currencies,” said Michael Every, head of financial markets research for Asia-Pacific at Rabobank in Hong Kong.

“Just imagine what would happen once you start seeing a global recession spreading on the back of this virus. It is not going to be favorable for the emerging markets at all.”

(Graphic: Reuters Poll Emerging Market Currencies - here)

The virus broke out late December in the world’s second biggest economy and with new infections reported outside China, expectations for the epidemic to be over in a few months are dwindling as the world’s economic wheels turn slower.

That had sent the Chinese yuan, the most actively traded emerging market currency, into a tailspin two months ago. It traded near a four-week high on Monday, largely reflecting the U.S. dollar’s biggest one-day drop in more than a year.

But the dollar’s strength was forecast to continue in the near term, according to the wider poll of currency strategists. [EUR/POLL]

In the latest, the onshore yuan CNY=CFXS was predicted to weaken about 1% to 7.01 per dollar in three months and hover around that rate in 12 months time. It was trading around 6.97 on Tuesday.

“A weaker yuan is another source of risk for emerging markets. Risks of a move higher in USD/CNY appear to be rising – and recent sensitivities suggest the potential for a meaningful impact of yuan weakness on emerging market assets,” noted Kamakshya Trivedi, chief emerging markets macro strategist at Goldman Sachs in London.

Central banks are now making efforts to mitigate risk from the virus outbreak. The Reserve Bank of Australia became the first in the developed world on Tuesday to slash interest rates since the outbreak went global.

From the emerging market nations, Malaysia’s central bank eased on Tuesday, with others expected to follow.

“Emerging market policy makers will follow the Fed getting more dovish, rather than being forced into hikes by FX. We remain bullish on EM rates, especially in Asia and Latam. It is likely too early to fade the EMFX sell-off,” wrote Johanna Chua, emerging markets Asia economist at Citi in Hong Kong.

Polling by Richa Rebello and Khushboo Mittal in BENGALURU; Writing by Vivek Mishra in BENGALURU and Vuyani Ndaba in JOHANNESBURG; Editing by Ross Finley and Lisa Shumaker

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