Emerging market currencies surged in May as investors looked for alternative assets while waiting for a recovery in mature economies, yet analysts warn that rise is set to end.
In a note released by Barclays on Saturday, the UK-based investment bank warned investors that currencies and sovereign bonds from emerging-market countries were still fairly expensive based on the risks they face, including the economic fallout caused by the coronavirus pandemic.
“Long-term fiscal sustainability will remain a challenge for some, even under optimistic post-Covid-19 assumptions”, said Nikolaos Sgouropoulos, a strategist for the bank.
The analyst emphasized how weak balance sheets and large budget deficits from these countries – including Chile, Mexico, South Korea, and India – could endanger the recovery of their currencies in the short term, as they may be forced to take on more debt to bring their economies back to life.
The MSCI Intl Emerging Market Currency Index, which tracks the fluctuation in the value of emerging-market currencies, was up 1.3% last week, while the US Dollar Index (DXY) is trading at 96.82 today, down 0.09% from Friday’s closing price and following a steep 1.4% decline last week.
This latest report from Barclays is in line with a note released by US research firm S&P Global Market Intelligence on Friday, where they highlighted that even though emerging market currencies may recoup some of their losses they are “not likely return to pre-crisis levels over our forecast horizon”.
The S&P report cited concerns from Deutsche Bank about a spike in virus cases in certain emerging economies such as Brazil, which has negative repercussions on its domestic currency.
“We remain very concerned about Brazil where the peak in epidemic curves seems to be between two-to-four weeks away, combined with looming risks of a debt crisis and impeachment”, said George Saravelos, a forex strategist at the German bank.
So far this year, the Mexican Peso and the Colombian Peso are leading the comeback, gaining 7.3% and 5.9% against the US dollar between 30 April and 29 May.