By Vuyani Ndaba and Vivek Mishra
JOHANNESBURG/BENGALURU (Reuters) - China's reopening is set to boost emerging market currencies against the U.S. dollar over the next six months, primarily for those that export commodities to the world's second-largest economy, a Reuters poll of foreign exchange analysts found.
Investor confidence towards emerging market assets has risen since China dropped its pandemic-era zero-COVID policy late last year but worries that the U.S. Federal Reserve has quite a bit more tightening in store have put a damper on sentiment.
Emerging markets face the significant risk of an extended series of Fed interest rate hikes and a strengthening dollar, both of which increase the burden of hard-currency denominated debt and lead to tighter financial conditions.
But China's reopening is expected to stimulate domestic consumption and tourism, which would benefit its neighbours in North and Southeast Asia, as well as various emerging economies that rely on commodity exports.
Despite the threat posed by higher U.S. yields in recent weeks, the MSCI Emerging Markets Currency Index remains almost 3% below its early February peak, as dollar bulls have reemerged.
"China's re-opening should drive stronger EM growth relative to the U.S.," noted Mikhail Liluashvili, strategist at Bank of America.
"Hard landing risks remain with us, but timing it is tricky as global growth has been surprising to the upside. In this environment, it is better to avoid direct USD exposure."
After a good start to the year for emerging market forex, the U.S. dollar has risen nearly 4% from its recent lows on rate differential support.
So long as U.S. inflation keeps drifting lower, however, strategists forecast emerging market currencies will perform better than majors, although not in a straight line upward in the near term.
"USD strength can persist for a bit longer, as the market tries to navigate the balance of global growth recovery and higher rates," wrote Mark McCormick, global head of FX strategy at TD Securities.
GROWTH TARGET
"(But) we continue to see few catalysts in the very near-term that could turn the narrative, though keep an eye on the upcoming China data dump."
China may set an economic growth target as high as 6% in a bid to boost investor and consumer confidence and build on a promising post-pandemic recovery, according to sources involved in policy discussions.
After falling about 8% last year, China's tightly controlled yuan was predicted to appreciate only around 4% to 6.67 per dollar in a year.