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Emerging currencies lose attractiveness and euro stands out due to advance in vaccination

For Saikat Chatterjee and Tom Arnold

LONDON, Apr 27 (Reuters) – After being among the winners of global reflation trades in early 2021, emerging market currencies are losing their luster at the end of the first third of the year, due to an increase in COVID-19 cases which is driving investors away.

While the dollar has traded lower in recent weeks, with the euro breaking above the $ 1.21 level on Monday for the first time in two months, emerging market currencies have faltered. A JPMorgan Emerging Market Currency Index has lost nearly 2% so far this year.

A low dollar is generally seen as a favorable factor for emerging markets, given their increasing dependence on the greenback and the profit boost it gives to their export-oriented economies, but since the pandemic there have been signs of that. correlation falters.

Developing markets have also been beset by a host of problems this year, including sanctions on Russia, elections in Latin America and turmoil in monetary policy. Meanwhile, new waves of COVID-19 infections spreading across countries from India to Brazil have cast a shadow over their assets.

“One of the biggest things we are seeing in currency markets is the superior performance in Europe,” said Kunal Shah, global director of emerging markets operations at Goldman Sachs.

“There is no consistent narrative for emerging market currencies in general, each country is at different stages when it comes to recovering from COVID. And that is holding back investors who focus on emerging market currencies as an asset class and it prompts them to focus on individual cases. “

The currencies that led the emerging market outperformance earlier this year against the dollar have suffered this month from rising COVID infections. The rupee is on the brink of its worst monthly performance since March 2020, after India’s infection rates hit a daily high on Monday.

Morgan Stanley strategist James Lord sees no good reason to buy emerging market currencies based on their growth prospects or fundamentals. The bank has a neutral stance on emerging currencies.

Certainly all is not lost. The more developed emerging market economies are making progress in terms of vaccinations and investors are optimistic about the outlook for countries like Chile and Israel.

With emerging market growth already expected to outpace that of the United States in the second quarter, emerging market currencies were overvalued even before the current period of weakness.

Europe appears to be rebounding in recent weeks with the fastest vaccination rate in several countries such as Germany and Spain.

And with investors already cautious about the outlook for the eurozone economy at the start of the year, the current improvement in campaigns, coupled with stabilizing yields on the region’s government bonds, has boosted the attractiveness of the eurozone currencies. continent.

The latest data showed that net euro positions rose by almost 2% in the week ending April 20, the first net material increase in positions since January, considering that bettors had consistently cut their long positions in the euro in 2021 .

By comparison, short positions in Brazilian reals against the US dollar are close to their highest levels since March 2020, according to weekly data.

(Reporting by Saikat Chatterjee and Tom Arnold; Edited in Spanish by Janisse Huambachano)

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