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Another selloff in emerging FX likely, but less severe: Poll

A clerk counts a bundle of Indonesian 100,000 rupiah banknotes for a photograph at a currency exchange office in Jakarta, Indonesia.
Dimas Ardian | Bloomberg | Getty Images
A clerk counts a bundle of Indonesian 100,000 rupiah banknotes for a photograph at a currency exchange office in Jakarta, Indonesia.

The risk of another sell-off in emerging market currencies in the coming year is high, foreign exchange strategists polled by Reuters said, although they do not expect it be as severe as the one earlier this year.

A rout in emerging markets that began in 2013 intensified in January and February this year as investors and speculators fled on expectations the U.S. Federal Reserve would gradually cut back its stimulus program, which had made unleashed cash into higher-yielding emerging assets.

Twenty-six of 33 strategists polled this week said the risk of another capital flight out of emerging economies in the coming year is high, including three who said very high. The remaining seven said the risk was low.

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But as the U.S. Federal Reserve is on track with reeling back its monthly stimulus, and a U.S. interest rate hike later next year is largely priced in by markets, strategists do not expect any further sell-off to be sudden or as severe.

"We expect many emerging market currencies to gradually come under pressure, as excesses of the unprecedented period of record low U.S. interest rates begin to reveal themselves," said Anezka Christovova, FX strategist at Credit Suisse.

A long-anticipated dollar rally is finally taking shape with the currency gaining across the board in July. The trend is expected to continue in the coming year, as positive U.S. economic data has strengthened expectations the Fed will tighten monetary policy next year.

The Turkish lira and South African rand were the focal points of the sell-off in emerging markets, excluding Asia and Latin America, at the beginning of the year, prompting both countries' central banks to increase interest rates - in Turkey's case sharply.

The lira, which lost over 15 percent last year, is expected to weaken a bit more, to 2.19 per dollar in six months and to 2.22 in a year. It was last trading at 2.16.

The rand, which has lost nearly 3 percent this year, is expected to trade around its current rate, at 10.70 against the dollar, in a month. It will then weaken to 10.73 in six months and to 10.80 in a year.

Russia's rouble, meanwhile, will fall to new record lows against the dollar over the coming year as economic and financial sanctions against Moscow for its role in the current crisis in Ukraine has sent investors fleeing.

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The rouble, currently trading at 36.20 per dollar, is down 10 percent against the dollar and is already the worst-performing emerging market currency this year.

The consensus is for it to weaken to 37.20 in a year, which would be its weakest rate ever.

"The risks of further U.S. and EU sanctions against Russia and possible retaliation are expected to affect the rouble in the short and medium term," Christian Lawrence, FX and interest rate strategist at Rabobank, said in a note.

— By Reuters

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