Emerging-market currencies: 2024 outlook

The external backdrop, such as trends in the US dollar, commodity prices and the global economic outlook, could support emerging-market (EM) currencies in the second part of 2024. But the risk of a US recession may weigh on EM currencies in the first half.

Among high-yielding currencies, we would favour the Brazilian real in 2024 because of its relatively cheap valuation and improving balance of payments flows. While fiscal slippage remains a risk for the real in 2024, we think it may not derail real outperformance should, as we expect, the external backdrop turn more supportive as the year goes on. The Brazilian real may perform better than the Mexican peso as it also provides a high carry but looks far cheaper. A progressive improvement in the global economy should also help the South African rand, although fiscal concerns may be more acute than in Brazil and general elections may lead to an increase in volatility. The poor fundamentals of the rand make it quite speculative, but it is worth remembering that the rand tends to outperform other EM currencies when the dollar depreciates.

Other currencies that may perform well as 2024 progresses could be the Polish zloty and the Korean won. The probable appointment of a new government in Poland following last October’s election should reduce political uncertainties and frictions with the euro area. Net capital flows from the balance of payments should continue to support the zloty, which, like the rand, is highly sensitive to trends in the US dollar. The Korean won is highly responsive to the global business cycle. Signs of a bottoming-out of Korean exports and probable monetary easing in the US should bode well for the won.

EM currencies closely managed by their central banks such as the Indian rupee could do well in the first part of 2024 should the US dollar remain strong. The rupee could also benefit in the first part of the year from the Indian economy’s relative immunity to a weakening global economy. That said, it may underperform their EM peers as the year goes on and the global economy recovers. In addition, the Reserve Bank of India is likely to rebuild its FX reserves should the US dollar depreciate.