By Silvio Cascione and Sumanta Dey
BRASILIA/BENGALURU (Reuters) - Emerging market currencies will slide further in coming months as investors fret over a slowdown in the global economy and seek safer havens, a Reuters poll showed on Wednesday.
Forecasts for currencies including the Brazilian real, the Turkish lira and the South African rand suggested the greenback is likely to set new highs against major emerging currencies, despite the Federal Reserve's hesitation over when to raise rates off zero.
When the Fed will eventually pull the trigger is still unclear. Markets are currently pricing in a more than 50 percent chance of a hike only by March next year, while a majority of economists still predicts it will be this December.
Still, that elusive first rate rise, when it comes, is likely to fan the dollar even higher.
Strategists have been calling for further depreciation of emerging market currencies for months. But the extent of the drop in recent weeks has caught many by surprise.
The Brazilian real, for example, has lost 57 percent over the past year and is likely to weaken 8 percent further from its Oct. 6 close in 12-months time to 4.15 per dollar, according to the median of around 30 estimates in the survey.
Although there have been no sudden stops of capital flows as in many of the previous crises, money has steadily exited emerging economies. This year is set to be the first year of net outflows since 1988, according to a recent report by the Institute of International Finance.
With growth prospects gloomy for China and other leading emerging economies, that outlook is unlikely to change, especially against a backdrop of global financial market volatility.
"We think a sustainable emerging-market rally will remain elusive," wrote Brown Brothers Harriman strategists, led by Win Thin, in a research note. "Indeed, the best we can probably hope for in 2016 is stabilization."
Emerging economies are set to grow just 4 percent this year, according to the International Monetary Fund, a worryingly slow pace to accommodate for their expanding debt and help reignite sluggish global growth.
Brazil's economy, Latin America's largest, is set to shrink nearly 3 percent this year, dragging the entire region down.
Exchange rates have weakened so much that, in many cases as in Brazil and South Africa, they are already considered undervalued. But fears of further credit downgrades have kept potential investors at bay.
"We do not believe South Africa is on an investment grade cliff, but we do believe continual growth undershoots over the forecast horizon to 2017 would imply a serious risk that South Africa could lose investment grade on a two-year horizon," BofAML analyst Matthew Sharratt said.
According to the median forecasts in the poll, the rand is expected to weaken 4 percent from Tuesday's close to 14.00 in 12 months. The Turkish lira is set to weaken 7 percent, to 3.15 per dollar, while the Mexican peso is expected to buck the trend and strengthen almost 2 percent to 16.36 a dollar.
The rapid falls in exchange rates has prompted policymakers from Mexico to Indonesia to step up market intervention to protect their economies. Strategists in the poll listed Brazil, China and Switzerland as countries most likely to remain under serious pressure to intervene in currency markets.
Selling FX reserves or currency swaps have helped reduce volatility in some cases, but strategists said it will not revert the current weakening trend and may even backfire.
In the case of Mexico, for example, increased intervention could actually hurt instead of helping the peso by raising concerns over the country's fiscal stance, said Alvise Marino, a strategist with Credit Suisse (SIX:CSGN).
(Polling by Anu Bararia, Khushboo Mittal in BENGALURU, Vuyani Ndaba in JOHANNESBURG, Miguel Gutierrez in MEXICO CITY, Nelson Bocanegra in BOGOTA, Ursula Scollo in LIMA, Felipe Iturrieta in SANTIAGO; Editing by Ross Finley and Raissa Kasolowsky)