Vivek and Vuyani Mishra

JOHANNESBURG/BENGALURU (Reuters) – Most emerging market currencies will continue to struggle against the mighty dollar over the coming year as the U.S. Federal Reserve finally delivers expected aggressive policy tightening, according to a Reuters poll of FX strategists.

This is what emerging market central banks have been preparing for for for many months. They’ve raised their benchmark rates to prepare. The moment that the Fed announces a half-point increase in interest rates and rapid shrinkage of the Fed’s balance sheets is important.

Minutes of the Fed’s March meeting revealed that officials generally had agreed to reduce the balance sheet by $95 Billion per month. This was a significant boost for the greenback, which was riding high.

A recent Reuters survey of more than 50 currency strategists revealed that nearly all emerging market currencies will weaken in the next 12 months.

The forecasts for currencies that have been pulled higher by commodity cycles and central bank policy tightening, such as the South African rand and the Brazilian real, show about half the gains lost in one year.

Both currencies are up 18% and 99% in 2022, respectively.

The Mexican peso – a classic emerging market foreign exchange hedge — is expected to lose more than three times its gains for this year in 12 months.

Paul Meggyesi from JPMorgan’s FX strategy, noted that EMFX is still resilient in light of the imminent Fed hikes.

EMFX has a special risk that the Fed will increase rates, and further upwards in U.S. yields might be driven more by real yields rather than breakeven inflation.

Meggyesi said that this is historically negative for emerging markets currencies.

Most emerging market currencies managed to survive the Fed’s tightening of policy relatively unharmed, but the Russian ruble and the Turkish lire were notable exceptions.

After falling by half in value over the last month, and hitting a record low of 150 USD after Russia invaded Ukraine, it was predicted that the rouble would fall more than 15% to 94.2 dollars in one year, from 78.5 today.

Export-oriented companies that sell foreign currencies are the main drivers of Russian currency. Low import activity is another factor. Analysts warn that the recent rally in the rouble won’t continue.

The recent gains are not indicative of Russia’s fundamental state. According to Lee Hardman (MUFG currency analyst), the economy will contract rapidly and inflation is likely to rise. This should make it more consistent over time with a weaker rouble.”

Hardman claimed that the Turkish lira was in a similar situation.

The government is intervening in support of the lira. However, they aren’t taking down the exact same kind of harsh measures such as capital controls that we see in Russia.

After falling 44% over the last year, it was predicted that the currency would plummet 15% to 17.27 USD in 2017 as it battles rampant inflation which reached a high of 61.14% in March, a twenty-year record.

Analysts predicted that China’s closely controlled Yuan would fall 1.4%-6.45 USD per year. They also warned against capital outflows from a narrowing yield gap between U.S. and Chinese 10-year bonds.

In Asia, the Indian rupee was set to fall between 1% and 3%.