Dollar gains on strong start to 2022

After a good start to the year for emerging market forex, the U.S. dollar has gained over the past two trading sessions after unexpectedly strong jobs data for January reduced market expectations for a Federal Reserve rate cut later this year.

So long as U.S. inflation keeps decreasing, strategists predict emerging market currencies will perform better than majors, although not in a straight line upward in the near term.

If U.S. inflation stays moderate and China continues to expand, a potential acceleration of U.S. global growth can lift risk sentiment, according to Themistoklis Fiotakis, head of FX research at Barclays.

Analysts said that while the reopening of China's economy after the removal of strict COVID 19 controls has improved sentiment, it is not necessarily a positive for China's balance of payments and the yuan.

After falling about 8 percent last year, China's tightly controlled yuan was predicted to appreciate only around 2 per cent to 6.62 per dollar in a year.

Many analysts said that the gains for emerging market currencies will probably be dominated by high-yielding currencies rather than low-risk bets.

Marko Kolanovic, chief global markets strategist at JPMorgan, pointed out that riskier emerging market currencies have historically been resilient to a Fed repricing as long as growth remains robust. When the market assesses Fed policy, the lowest-yielding currency is usually the first casualties.

Carry trades are backed by widening interest rate differentials, where traders borrow in low interest rate currencies and buy those that provide a higher rate of return.

There was no clear majority opinion on which segment of emerging market currencies would perform better over the next three months. Nineteen of 40 respondents said high-yielding currencies, 11 said commodity currencies, and ten said low-yielding currencies.

Commodity currencies are expected to appreciate due to China's economic reopening.

The Russian rouble is expected to slip over 0.3 per cent, with the Canadian, Australian and New Zealand dollars forecast to rise 0.1 per cent to 1.2 per cent.

South Africa's rand, a high-yielder, had lost almost 4 per cent so far this year, but was expected to recover by almost 3 per cent in the next three months to 17.07 per dollar.

The Reserve Bank said that the despite the serious economic challenges, such as widespread electricity shortages, will almost completely curb growth this year.

The Turkish Lira, which has lost 90 per cent since President Tayyip Erdogan came to power nearly a decade ago, is poised to fall another 14 per cent to 21.9 in the next 12 months.

India's rupee, which ended up one of the worst performing Asian currencies in 2022, will only reduce some of its losses over the next year.