Hike rates

Emerging market currencies may get support if their central bank rates rise

According to a recent Reuters poll, the decision of the US Federal Reserve to implement several rate hikes this year could keep emerging market currencies under pressure in the short term. However, countries that have decided to raise their interest rates will see their currencies perform better within the group in the coming months.

More than 70% of economists surveyed believe currencies such as the Brazilian real and Russian ruble can retain their strength against the rising US dollar, as their respective central banks have already undertaken rate hikes. While Brazil’s central bank announced a rate hike of 875 basis points since the start of the pandemic, its Russian counterpart announced an interest rate hike of 425 basis points, measures that will support their respective currencies. .

At the last FOMC, the Fed announced its decision to implement its first rate hike since the start of the COVID-19 pandemic in March as well as its decision to end its bond purchases. In addition, President Jerome Powell had explained that the US economy would need the Fed to raise interest rates several times through 2022 to offset the surge in inflation.

These comments had served to renew investors’ interest in the greenback, following which several other currencies in the forex market – especially the more volatile emerging market currencies – began to trade lower. . Pressure on emerging market currencies has also increased due to risk aversion amid geopolitical tensions driven by the possibility of a military conflict between Russia and Ukraine – a factor that has pushed more to buy the green refuge ticket.

These currencies started 2022 on a bullish note, however, with the Brazilian Real and South African Rand strengthening by up to 5% amid US Dollar weakness. However, the Fed’s rate hike decision abruptly halted this trend, again leading to higher investor inflows into the US currency.

Emerging market central banks implementing their own rate hikes to counter rising inflation within their economies may offer some relief, pushing their currencies higher. Economists are most bullish on BRL and MXN amid hawkish expectations from their central banks, while ZAR and INR could come under some pressure as their central banks continue to maintain a dovish stance for now .