Emerging Markets Poised for Reversal: Bank of America Signals Bullish Turn for EEMEA Currencies
The pervasive pessimism surrounding Eastern Europe, Middle East, and Africa (EEMEA) foreign exchange (FX) markets may be nearing its end, according to a recent analysis by Bank of America (BofA). The bank’s analysts suggest that the tide is about to turn for these currencies, potentially as early as February or March 2024. This optimistic outlook stems from BofA’s proprietary flow data, which reveals a record high in long positions on the U.S. dollar against emerging market (EM) currencies. This extreme positioning is interpreted as a contrarian indicator, suggesting that EM and EEMEA FX are ripe for a period of outperformance. While a strengthening dollar has historically pressured emerging market currencies, the current saturation of long dollar positions indicates a potential reversal, creating opportunities for investors seeking undervalued assets.
BofA’s bullish stance on EEMEA currencies is further reinforced by specific country analyses. In Poland, the zloty (PLN) is expected to appreciate against the dollar due to a confluence of factors. A weakening dollar, coupled with a hawkish monetary policy maintained by Poland’s National Bank (NBP), is expected to underpin the zloty’s strength. Furthermore, positive current account dynamics and robust foreign direct investment (FDI) inflows are projected to bolster the Polish economy and support the currency’s upward trajectory. Similarly, the South African rand (ZAR) is predicted to benefit from a weakening dollar environment. The analysts highlight the rand’s current undervaluation against the dollar, anticipating a correction as the greenback loses its dominance.
Perhaps the most surprising call is BofA’s optimistic outlook for the Turkish lira (TRY). Despite the lira’s recent struggles, the analysts believe that tight monetary policy implemented by the Turkish central bank will support adjustments in the current account, ultimately benefiting the currency. Their forecast for the TRY is significantly more bullish than current market expectations reflected in forward rates, suggesting a strong conviction in the lira’s potential for recovery. This positive outlook diverges from the prevailing bearish sentiment towards the lira and represents a bold prediction from BofA.
While bullish on many EEMEA currencies, BofA maintains a neutral outlook for the Israeli shekel (ILS). Their forecast for the shekel aligns with current market forward rates for the second quarter of 2025. However, the analysts acknowledge potential upside risks for the currency if ceasefire agreements in the region are fully implemented and translate into sustained stability. This cautious optimism reflects the complex geopolitical landscape surrounding Israel and its impact on the shekel’s valuation.
In Central Europe, the Czech koruna (CZK) is also expected to outperform market expectations. While the Czech National Bank (CNB) is anticipated to embark on an easing cycle, the analysts believe this will be approached cautiously in the short term. Combined with the projected weakening of the US dollar, these factors are likely to provide support for the koruna, leading to a stronger performance than currently implied by forward rates. Similarly, the Hungarian forint (HUF) is positioned for gains from the second quarter onwards. This positive outlook is attributed to the credibility of the new central bank leadership and sound fiscal policy, reinforced by the anticipated weakening of the US dollar.
In summary, Bank of America’s analysis paints a picture of an impending shift in EEMEA FX markets. The confluence of a weakening dollar, robust economic fundamentals in several countries, and proactive monetary policies create a compelling case for a bullish turn in these currencies. While risks remain, particularly geopolitical uncertainties in certain regions, the analysts’ conviction, supported by proprietary flow data and in-depth country assessments, suggests that the potential rewards outweigh the risks for investors willing to position themselves ahead of the curve. This analysis provides a valuable perspective for investors seeking opportunities in emerging markets and highlights the potential for significant gains in EEMEA currencies in the coming months. The divergence between BofA’s outlook and current market sentiment underscores the potential for alpha generation for those willing to take a contrarian view.
