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This Currency Could Climb on Fed Exit News

Wednesday, 19 Jun 2013 | 3:47 AM ET
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Emerging market currencies may have been tanking across the board recently as fears of a scaling back of U.S. Federal Reserve bond purchases add to concerns over a slowdown in China, but analysts have handpicked one Latin American currency that could receive a boost on Wednesday's Fed announcement.

"The Mexican peso will perhaps perform a little," Anders Eklof, a currency strategist at Swedbank told CNBC Wednesday looking ahead to the keenly-awaited policy statement by the Federal Reserve as it wraps up a two-day meeting at 7 p.m. London time on Wednesday.

(Read More: Why Emerging Markets Are Still on Shaky Ground)

"Some of the EM (emerging markets) currencies that have been sold off so heavily, perhaps (they) can come back a little bit...but uncertainty will prevail."

Emerging market currencies have seen massive outflows in recent weeks, with concerns that reduced liquidity from the Fed will hit riskier assets and boost safer assets like the dollar. The Mexican peso has depreciated nearly 8 percent against the dollar since mid-May, the South African rand nearly 12 percent and the Brazilian real nearly 9 percent. Meanwhile perceived safe-havens like the Swiss franc and the Japanese yen have remained fairly strong.

"[The Mexican peso] benefits from the mutual exclusiveness of its growth prospects (which are dependent on the U.S.'s) and the risk from the prospective Fed exit," currency analysts at Societe Generale said in a research note on Wednesday.

(Read More: Why the Emerging Market Bull Run Is Over)

Mexico's current account deficit has been relatively robust compared to other emerging markets, SocGen said. The recent episodes related to Fed exit concerns show countries with larger current account deficits are susceptible to Fed moves (for example – India, Turkey, South Africa, Indonesia and Brazil) and their currencies could deteriorate further before stabilizing, SocGen said.

Confidence in Euro Is Growing: Pro
Max Knudsen, chief market strategist at ADS Securities, highlights the strong improvement in the euro over the past four weeks and the growing confidence in the currency.

"Mexico still has more cushion as the risk from a Fed exit and Mexico's growth concerns at present are almost mutually exclusive. Since the Fed's exit is deemed contingent on a pick-up in labor market indicators (which should also see robust growth in the economy), Mexico's growth prospects will improve, given its dependence and co-movement with the U.S., before the Fed starts withdrawing and the liquidity situation tightens, " it said.

Meanwhile, Eklof said that the emerging market sell-off was not solely down to Fed fears; Chinese growth concerns also played a large part.

(Read More: Fiesta or Siesta Time for the Peso?)

"It's definitely not a Fed story, it's a story about China not performing as good as many had expected before. So definitely, we don't see a lasting rally for EM currencies, uncertainty is there," he said.

"In particular, the currencies that have current account deficits. They will perhaps have some funding issues going forward when they don't have access to this short term funding through portfolio investments etc."

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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