Investors are long in developing-nation currencies as well as the Japanese yen. However, Bank of America Merrill Lynch doesn’t expect the trend to last.
Experts believe the yen will weaken and emerging-market currencies turn more mixed later this year as the Federal Reserve tightens policy and U.S. tax reform comes through.
In the unlikely event of a risk-off correction over summer, the yen and emerging-market currencies will diverge, with the former gaining and the latter weakening, strategists Athanasios Vamvakidis and David Hauner say.
“EM and JPY are likely to diverge in both good and bad case scenarios,” Vamvakidis and Hauner wrote in a May 18 note. “We expect it most likely to happen after the summer, as monetary policies diverge and a number of risk events could increase market volatility.”
Japan's currency has noted a 5.4 percent rise against the dollar this year, whereas 18 of the 24 emerging market currencies tracked by Bloomberg have seen gains, from a 12 percent advance for the Polish zloty to the 4 percent gain in the Malaysian ringgit.
There are several factors that could impact the risk rate including political turmoil, Fed hikes, President Donald Trump’s tax reform, the tapering of quantitative easing in Europe, German elections and Brexit negotiations, the strategists said.
Read more at Bloomberg.