JOHANNESBURG BENGALURU Reuters - Central bank intervention via U.S. dollar sales won't strengthen emerging market currencies against an ever-dominant dollar, and many analysts expect authorities to hike rates more aggressively, according to a poll by the central bank.
Most emerging market currencies have hit their lowest levels in at least a decade, and will probably remain around there or sink deeper as the dollar is yet to reach an inflection point, according to currency strategists polled by Reuters Sept. 30 -- Oct. 5.
After the U.S. Federal Reserve turned to a uber-hawkish position to tame stubbornly high inflation earlier this year, a few emerging market central banks began selling dollar reserves to stem capital outflows and defend local currencies. The sell-off has not abated.
Hendrix Vachon, a senior economist at Desjardins, said that selling the U.S. dollar might help limit the depreciation of emerging market currencies, but it won't be enough to stop it.
One third or 14 of 45 strategists said nothing could be done to strengthen emerging market currencies over the next six months, as a result of an extra question.
Around 40% said hiking interest rates more aggressively was the best approach to curbing the downturn, while 13% proposed continuing selling dollars.
The decision by the OPEC to reduce production by the deepest level since the 2020 COVID pandemic is expected to steam emerging market currencies and increase investor sentiment.
The most traded currency in emerging markets - the tightly controlled Chinese yuan - was predicted to hover around 7.13 after hitting 7.25 last week, a level that was last seen during the 2008 global financial crisis.
The yuan's slide shows relative success compared to other battered currencies despite interventions by Chinese authorities in recent weeks to slow the yuan's slide. Analysts said they faced long odds against an unstoppable dollar.
The yuan was expected to recover only marginally to 7.03 per dollar by the end of March.
Johanna Chua, chief economist for Citi Asia-Pacific, said that the policy rates will remain the same as the US will continue to exert more depreciation pressure and that the negative rate differentials with the U.S. will be more severe going into 2023 -- 24 FY.
Like other smaller EM currencies, South Africa's rand -- heavily dependent on China's appetite for its commodities -- was unlikely to mimic its biggest single country trading partner's currency. The rand was expected to lose another 0.5% to 17.92 within a month and trade near those levels by the end of the year.
Mark Cus Babic, macro research analyst at Barclays, said that the rand should not be affected by global risk sentiment.
According to a separate Reuters poll, the current account was expected to swing to deficit in the coming year, and the terms of trade have deteriorated in Africa's biggest economy.
Since the invasion of Ukraine in June, the Russian rouble has been artificially propped up and is expected to lose 7% to 65.00 in six months. Barclays said the rouble seemed to react no longer to economic developments. Asia's third largest economy, India, was expected to see its battered currency trading around its current level of 81.5 by the end-year, vulnerable to worsening trade balance and aggressive U.S. Federal Reserve rate-hiking.