Reuters poll showed FX market will misstep while Trump`s economic plans aren`t clear

The latest race in emerging market currencies is unlikely to last long. As a Reuters poll shows, recent gains are expected to decrease soon. This as the economic policies of U.S. President Donald Trump become clearer.

Sentiment has been buoyant since Trump’s taking possession. Mostly on hopes that a fresh boost of economic stimulus will boost commodities prices. Such a boost would help sustain economic growth.

But currencies are nevertheless set to give up gains over the next six months. This will happen in currencies such as the Brazilian real, the Russian rouble and South Africa’s rand.

FX Market expecting high losses shortly

In six months, the real is expected to lose almost 6% to 3.29 per dollar. Furthermore the rand is forecast to give up 7% to 14.25. Trump has kicked off his first few days in office mostly focusing on foreign policy. Markets are awaiting more detail on his economic policies.

With the U.S. economy already bumping up against full employment, Trump’s promises on fiscal stimulus and tax reform could quickly spur higher inflation as would imposing tariffs on Mexican imports.

Fed officials see three rate hikes this year, a pace considerably faster than in 2016 and 2015. Higher U.S. interest rates usually weaken emerging currencies against the dollar.

João Pedro Resende, an economist with Brazil bank Itaú Unibanco, also mentions upcoming elections in Europe as a potentially risk for new currencies, especially in France, where candidate Le Pen promises to leave the currency union. The first-round vote will be in April.

Even the Mexican peso gained in past weeks. It come back from record lows after Trump’s drama with the North American Free Trade Agreement (NAFTA). Trump threatened to ditch NAFTA. He also has promises of building a wall funded by a hefty border tax. 

Most strategist bet that Mexico will fend off a credit rating downgrade in 2017. And the peso is expected to stay stronger than its record low of 22 per dollar despite some losses projected for the next 12 months, the poll showed, with chances of a short squeeze soon.


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