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.
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.