As we approach 2024, emerging market currencies, particularly in Asia, are displaying an encouraging potential for growth. This optimism is helped by the strengthening of Asian currencies against falling US Treasury yields.
A potential weakening of the US dollar trend in the forthcoming year could give these currencies a boost.
In Asia, Indonesia, India, and Korea stand out with promising economic narratives. Indonesia’s economy shows potential, India’s growth market is ripe with opportunities, and Korea’s export-led recovery indicates a return to current account surplus.
These narratives collectively contribute to a positive regional outlook.
If the US manages a ‘soft landing’, it could trigger a surge in the strength of emerging market currencies, backed by central bank policies, strong economic growth, and increased foreign investment.
Currency gains will also play a key role in determining overall gains from country-specific investments.
AsianInvestor asked asset allocation and currency specialists for their predictions on which emerging market currencies will shine in 2024.
The following contributions have been edited for clarity and brevity.
Jerome Tay, investment manager of Asia fixed income
In 2024, we anticipate favourable prospects for emerging markets and Asian currencies as the dollar consolidates after the Fed concludes its tightening cycle.
Among Asian currencies, we expect the Indonesian rupiah, Korean won and Indian rupee to outperform in the region if the Fed manages a “soft landing” transition.
Indonesia’s robust fiscal performance will likely continue into 2024 resulting in a lower-than-projected fiscal deficit by the officials.
Although short-term volatility may arise due to impending elections, the allure of Indonesia’s government bonds—owing to its attractive real yields—and the government’s large cash surplus accumulated from previous fiscal years are poised to attract increased foreign ownership, especially after the Fed starts to reduce interest rates.
Additionally, the Indonesian rupiah’s strength will also be supported by tailwinds from the central bank’s strong foreign reserves, alongside policies to attract the repatriation of offshore export proceeds.
As for the Korean won, it stands to benefit from idiosyncratic tailwinds, including the recovery in exports as well as the bottoming-out of semiconductor chip prices.
Beyond its high sensitivity to the dollar, we also anticipate heightened foreign inflows into its capital market, which would fuel increased demand for the currency.
Lastly, the Indian rupee is expected to remain supported by a narrowing currency account deficit as well as strong foreign reserves held by the RBI.
Additionally, the currency’s low foreign exchange volatility and favourable carry-to-vol characteristics will further support foreign demand for the Indian rupee in 2024 as the Fed cuts policy rates.
Jennifer Kwan, senior investment specialist, global fixed income, currency and commodities
JP Morgan Asset Management
Asian currencies reversed their recent trend and appreciated against the US dollar since mid-October, supported by the fall in US Treasury yields, as the 10-year US Treasury yield dropped to 4.33% at the end of November after touching 5% in mid-October.
Asian currencies in particular have been a consistent driver of US dollar strength throughout the year given their low carry profile.
That narrative has started to shift as confidence around a soft landing has increased in recent weeks and market pricing for rate cuts in the US has become more entrenched, with 125 basis points priced in for next year.
As yields tend to fall at the final stages of a hiking cycle, we expect the interest rate differentials between Asia and the US to reduce, providing further support to Asian currencies.
In China, we also see the yuan fixing has been stronger, which tends to indicate that officials are more wary of the weakening in the currency, so they are likely to continue to support the rise or stability of the yuan.
As we see clearer evidence that the US economy is slowing, the Asian economy is likely to enjoy a healthy growth differential. This, coupled with falling real yields, is expected to be a driving force for more sustainable strengthening in Asian currencies.
Sim Moh Siong, currency strategist
Bank of Singapore
Sim Moh Siong
After a period of turbulence in late summer due to the stronger US dollar, the glass is turning half full again for emerging market (EM) currencies.
High-carry EM currencies like the Mexican peso and Brazilian real will likely do well in early 2024, benefitting from anticipated Fed easing.
But performance is unlikely to be as strong as in the first half of 2023, as carry gets eroded by EM central bank rate cuts, potentially higher global volatility from the US election campaign and a mild US recession by mid-2024.
Chinese yuan pessimism has peaked after a series of stronger daily Chinese yuan fixes, additional property easing measures in China, and the constructive Asia-Pacific Economic Cooperation (APEC) meeting between Presidents Biden and Xi.
But barring a more convincing pick up in Chinese growth, the path towards a stronger Chinese yuan will remain muted. A muted Chinese currency outlook could hold back lower-yielding Asian currencies although a tech lift is set to benefit currencies in the more technology-export-oriented economies like the Korean won.
There is scope for a reversal of the Turkish Lira’s major underperformance from this year if the return to policy orthodoxy in Türkiye is sustained after local elections in March.
Rick Cheung, global emerging market fixed income portfolio manager
BNP Paribas Asset Management
Recent economic data releases indicate that US Federal Reserve has reached the peak of its tightening cycle.
We believe the weakening US dollar trend has just begun and it will be a tailwind for EM currencies next year.
EM FX carry continues to be positive, and REER (real effective exchange rates) valuations point to many EM currencies looking attractively valued.
For Asia countries, we favour countries with strong economic growth outlook, namely Indonesia, India and Korea.
Indonesia has a very positive economic trajectory.
GDP has recovered well and is expected to stay at around 5%. It is also one of the first Asian countries to achieve inflation within the central bank’s target.
The current account is more robust due to the structural change in the mining industry. Together with the high interest rate level compared with regional peers, we expect the currency to be the top focus in 2024.
India is a key beneficiary of this multi-polarised world and one of the largest growth markets. Potential GDP growth is high and structural reforms have been overall successful. Together with the benchmark inclusion of government bonds, the Indian rupee will benefit from strong foreign investment flows.
Korea’s export growth has started to pick up with the solid demand for AI and semiconductor inventory restocking.
The export recovery brings the current account back to surplus and boosts economic growth. Inflation falling faster than expected recently gives room for the central bank to ease monetary policy.
The positive current account and potential portfolio inflows will give strong support to the currency.
Guan Yi Low, head of fixed income, Asia Pacific
Guan Yi Low
Recent comments from the US Federal Reserve suggest a decreasing inflation trend, yet predicting the timing of policy rate cuts remains challenging due to the resilience of the US economy.
As expectations for rate cuts evolve, the US dollar is likely to see corresponding fluctuations.
However, the nearing end of the Fed’s rate hike cycle should lessen its negative effect on EM currencies in the upcoming year.
We anticipate a boost in Asian currencies, especially the Korean won, Singapore dollar, and Malaysian ringgit, supported by a recovery in the electronics trade cycle — crucial for these countries.
Additionally, currencies with unique advantages, like the Indian rupee, also stand out.
India’s robust economic prospects and favourable balance of payments, bolstered by investment inflows, position the rupee favourably.
The inclusion of Indian government bonds in the JPMorgan GBI-EM index from 28 June 2024 is expected to further attract passive portfolio flows next year.
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