"Investors look to emerging markets as planets align for end of dollar bull market"

" Investors look to emerging markets as planets align for end of dollar bull market \r\n\r\nAs the US dollar tumbles from multi-decade highs, some investors are betting emerging market currencies will be big winners from a sustained reversal in the greenback.\r\n\r\nThe MSCI International Emerging Market Currency Index is up nearly 5% from its lows and notched its best monthly gain in about seven years in November, as expectations that the Federal Reserve will soon slow the pace of its interest rate hikes bolstered the case for investors betting on emerging market currencies.\r\n\r\nSigns of a broader turn in dollar sentiment are visible in the buck\u2019s 8% decline against a basket of developed market currencies from its September highs. In futures markets in November, speculative traders swung to a net short position on the U.S. dollar for the first time in 16 months, calculations by Reuters based on U.S. Commodity Futures Trading Commission data showed.\r\n\r\n\u201cThe planets are lining up for a dollar bear market,\u201d said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US.\r\n\r\nEmerging market currencies have outperformed their developed market counterparts this year, with MSCI\u2019s index of emerging market currencies down 5% year-to-date, while the dollar\u2019s G10 peers have lost nearly twice as much.\r\n\r\n EM currencies rebound \r\n\r\nIn addition to the possibility of slower Fed hikes, investors cited expectations that China will loosen its strict COVID-19 containment policy and comparatively rich yields found in many EM countries as reasons for adding to positions in emerging market currencies.\r\n\r\nAmundi\u2019s Upadhyaya is focusing on the currencies of high-yielding emerging market countries that have balanced current accounts and smaller budget deficits, including the Brazilian real , Peruvian sol = and Indian rupee .\r\n\r\nSome emerging markets offer attractive yield even adjusted for inflation. For instance, the inflation-adjusted yield on the U.S. 10-year Treasuries is at 1.08%, compared with 6.07% for the Brazilian equivalent.\r\n\r\n CHINA WATCH \r\nInvestors have cheered the prospect of a shift in China\u2019s COVID-19 policy, after rare street protests increased pressure on officials to ease some rules. China \u2013 the world\u2019s second-largest economy and a key consumer of the commodities produced by many emerging market countries \u2013 is set to announce a further easing of its COVID curbs as early as Wednesday, sources said.\r\n\r\nThe Chinese yuan is up about 5% against the dollar since late October and posted its best weekly performance against the U.S. currency in at least two decades on Friday, while the Hang Seng Index rose 27% in November, its best month since October 1998.\r\n\r\n\u201cI think the cat is out of the bag. They can\u2019t go back to their pure restrictive zero COVID policy,\u201d said Jack McIntyre, a portfolio manager at Brandywine Global.\r\n\r\nMcIntyre has been increasing exposure to some Asian currencies, including the Thai baht and the Malaysian ringgit . Thailand\u2019s currency rose 8% in November, while the ringgit has appreciated 6%.\r\n\r\nSome investors think it may be too early to bet on a sustained dollar reversal. While Fed Chair Jerome Powell said last week it was time to slow the pace of coming interest rate hikes, the central bank could raise rates further than previously anticipated as it fights the worst inflation in decades.\r\n\r\nAt the same time, signs of stubborn inflation in next week\u2019s U.S. consumer price data could reignite bets on Fed hawkishness and boost the dollar.\r\n\r\nInvestors broadly expect the Fed to raise rates by 50 basis points next week, after a spate of 75 basis-point rate increases.\r\n\r\nConversely, tightening by central banks around the world also risks sparking a global recession, a scenario some believe could hurt emerging market currencies and help the dollar.\r\n\r\nA global slowdown \u201cwould create a safe haven bid and limit the ability of most cycle-sensitive currencies to rally against the dollar,\u201d said Aaron Hurd, senior portfolio manager, currency, at State Street Global Advisors.\r\n\r\nOthers, however, are betting China\u2019s reopening bodes well for certain emerging-market currencies.\r\n\r\nCarlos Fernandez-Aller, head of Global FX and EM Macro trading at Bank of America, sees an eventual China reopening boosting the Thai baht, which he believes will benefit from an increase in tourism.\r\n\r\nAnalysts at Soci\u00e9t\u00e9 G\u00e9n\u00e9rale, meanwhile, said an easing of China\u2019s COVID restrictions could buoy the South African rand , forecasting an 18% gain in total return terms for the commodity exporter\u2019s currency next year.\r\n\r\n\u201cImprovements in fundamentals, valuations, and technical factors make the argument for stronger EM FX performance over the next year,\u201d they wrote in a recent report."

"Investors look to emerging markets as planets align for end of dollar bull market"

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