Strong run in emerging market currencies set to continue, UniCredit says

The recent better tone in emerging market currencies had further to run, UniCredit told clients, thanks to the 'green shoots' visible in China.

Absent big shifts in the fundamentals over coming months, capital outflows would matter more than ever in determining in which direction exchange rates would be headed, Kiran Kowshik, EM FX strategist at UniCredit Bank London said in a research note sent to clients.

With that in mind, he pointed out how EM equity market funds were still 'underweight' to a degree not seen since late 2011.

That mattered because historically shifts to an EM-equity-investing mind set have been associated with positive EM FX performance, Kowshik said.

"Given that the allocation shift appears to still be in a relatively nascent stage, the EM FX rally that developed in February may continue over the coming few months."

As regards local-currency denominated debt funds, Kowshik said inflows might remain supportive, but current positioning - fairly close to neutral - meant the flows might not persist at the same rate as seen over the first three months of the year.

The UniCredit strategist said he preferred focusing on South Africa's rand, the Russian ruble and Polish zloty in the CEEMEA space.

High-beta currencies such as Malaysia's ringgit, Indonesia's rupiah and the Chilean peso should also continue to fare well, he said.