Emerging Market Currencies Could End 2021 on a High Despite Inflation
Aiswarya Gopan • 2 min read
After months of insisting that the effects of high inflation would be transitory, policymakers around the world now accept that it could be here to stay for longer. However, the impact of sharp spikes in inflation would have limited impact in the forex market, especially as far as emerging market currencies are concerned, as central banks start looking at hiking interest rates as a fix.
Economists forecast several leading emerging market currencies to end 2021 on a high note and post a strong performance through the current quarter, despite the worries about the uncertainties driven by the pandemic. They are especially upbeat about the outlook for the South African rand (ZAR), Russian ruble (RUB) and the Thai baht (THB).
In recent weeks, we have seen the US dollar strengthen after the Fed signaled readiness to start tapering its monthly asset purchase program even as policymakers suggest the possibility of a rate hike sooner than previously expected. This has led to analysts forecasting a period of bullishness in the greenback over other key currencies in the near term.
On the other hand, the prospects of surging inflation in emerging economies threatening to derail their economic recoveries have been keeping their currencies trading under pressure lately. However, respondents to the latest poll by Reuters expect the ZAR and MXN to strengthen by around 3% in the coming six months while the RUB could mark 2% gains during the period.
Emerging market currencies could hold steady and possibly even firm up against the US dollar in the coming months as several central banks in these economies have already started increasing interest rates after bringing them down to record lows to counter the effects of the pandemic early last year. In addition, economists are also optimistic that these economies have strong fundamentals that can support their currencies through the period.