Tokachi Group - Emerging Market Currencies Rebound

Washington, USA, November 11, 2015 (Newswire.com) - ​Tokachi Group has told institutional clients that emerging market currencies could be about to stage a dramatic recovery after a year of steep losses.

Currencies from Brazil’s real to Indonesia’s rupiah have weakened significantly against the US dollar as investors have sold EM currencies in order to repatriate capital to the United States in anticipation of a hike in interest rates.

With investors more convinced that the Fed won't raise rates, there may be some reversal of the outflows we've seen this year which should take some of the heat off the emerging market currencies.

Tokachi Group, Currency Strategist

However, following the weak September US nonfarm payrolls data, it is unlikely that the Federal Reserve will raise rates when evidence is mounting that the economy is slowing.

“With investors more convinced that the Fed won’t raise rates, there may be some reversal of the outflows we’ve seen this year which should take some of the heat off the emerging market currencies,” said a Tokachi Group currency strategist.

“We’d be very surprised to see sharp gains just yet but, if the outlook for the US economy deteriorates further, it brings into play the potential for more Fed stimulus and, at that point, all bets will be off,” he added.

Capital outflows have heaped pressure on emerging economies with inflation becoming a clear and present danger. Brazil has been particularly hard hit with inflation running at an annual rate of 9.6% while Indonesia copes with a 6.8% rate, though it has recently been trending lower.

“The effects of Fed monetary policy extend far beyond America’s borders. The US dollar is the world’s reserve currency and despite calls for less reliance upon the greenback from countries like Russia and China, most of the world’s trade is still conducted in the currency,” explained the Tokachi Group.