Investors returning to EM currencies

SYDNEY: The US dollar’s run is ending, and it’s time to return to emerging-market currencies after their two-month slump, according to AMP Capital Investors Ltd.

The advance in treasury yields across the curve will probably stall from here, while US-China trade tensions will turn from being dollar positive to negative, said Nader Naeimi, who runs AMP’s US$1.2billion Dynamic Markets Fund and has begun shorting the greenback.

In contrast, the sell-down of emerging markets has resulted in a buying opportunity for some of their currencies given their healthy economies, he said.

“Step one was to close all our shorts entirely on our emergingmarket currencies — we’d previously had shorts on the Turkish lira, Russian rouble, Thai baht and Mexican peso,” said Sydney-based Mr Naeimi. “Now we’re getting ready to buy some EM currencies.”

The $142-billion asset manager’s shift comes as interest rate increases from Turkey to Indonesia and the Philippines slow capital outflows and support emerging-market currencies.

Meanwhile, weeks of political turmoil in Italy, finally resolved on Friday, had dented investor confidence in developed markets and raised questions about the pace of increases by the Federal Reserve. The Bloomberg Dollar Spot Index has advanced about 4% in the past two months, driven by higher Treasury yields.

Gains in two-year treasury yields, which in May touched the highest since 2008, are probably limited given their spread above the fed funds effective rate, according to AMP. Meanwhile, President Donald Trump’s back-and-forth on Chinese trade has undermined his negotiating position, Mr Naeimi said.

Last Thursday, the Trump administration announced it would impose steel and aluminium duties on the European Union, Canada and Mexico, after refusing their calls for permanent exemptions. The penalties took effect on Friday.

Asian currencies such as the Indian rupee and Indonesian rupiah, which have been sold off, are now favoured, according to Mr Naeimi. The Brazilian real will benefit from stronger commodity prices as the global economy continues to grow, he added.

Even Malaysia, where the opposition is in charge for the first time in six decades, is enticing. “There are political issues there, sure,” he said. “But the ringgit’s sell-off is presenting opportunities.”

AMP is not alone in its bullish view on emerging markets. Morgan Stanley strategists say they see an opportunity for investors to go long the South Korean won, rupiah, lira and Chilean peso.

“The EM policy response to the US dollar rally, including rate hikes, fiscal measures, and intervention, has made EM forex relatively more attractive,” they wrote.