The Tell: Emerging-market currencies are bound for turbulence in the fourth quarter

Emerging-market currencies, which have enjoyed solid gains to date, could face intense pressure in the last three months of 2017, a strategist said.

A weaker dollar and ultralow rates, amid stubbornly low measures of inflation, have conspired to keep greenback underwater. However, that dynamic could change if the Federal Reserve increases interest rates in December, as currently anticipated, and if inflation gauges perk up.

Piotr Matys, emerging-markets currency strategist at Rabobank, said currencies pegged to the dollar in the region of Central and Eastern Europe as well as the Middle East and Africa, known as CEEMEA, “will all struggle to hold their year-to-date gains in the fourth quarter, as we expect a correcting rebound for the dollar into year-end.”

One measure of emerging-market performance, the exchange-traded WisdomTree’s Emerging Currency Strategy Fund

CEW, -0.21%

which includes an equal-weighted basket of emerging-market currencies, was down by 0.2% at $18.99 on Tuesday, but boasts a an 8.6% year-to-date gain.

Matys said mixed economic reports in the U.S., as well as speculation about Fed Chairwoman Janet Yellen’s replacement, if she isn’t renominated at the end of her term in February, also are weighing on the buck. Clarity on those factors are likely to provide the currency a bounce, he said. The ICE U.S. Dollar Index

DXY, +0.24%

which measures the dollar against a basket of six rivals, has shed 8.5% so far in 2017, according to FactSet data.

Doubts about President Donald Trump’s efforts to get a package of dollar-boosting legislations passed in Congress also have been a drag on the currency.

“There seems to be so much market skepticism about the Trump administration that any positive surprise on tax reforms could trigger a sharp squeeze in the U.S. dollar,” Matys added.

South Africa’s rand

Matys said South Africa’s rand

USDZAR, +0.6128%

may be particularly vulnerable to a downdraft due to a strengthening buck as the country has “weak fundamentals and [a] bleak outlook dominated by political uncertainty.”

Read: Emerging market investors brace for shrinking Fed balance sheet

On Tuesday, the buck jumped to an intraday high of 13.4700 against the rand—a two-day high—compared with 13.3163 late Monday, as political uncertainty in the region escalated.

South African President Jacob Zuma, whose administration has been in turmoil for much of this year, on Tuesday, kicked Blade Nzimande, the head of the Communist party and higher education minister, out of his cabinet. Zuma also moved David Mahlobo, former state security minister, to become energy minister. So far, the rand is still up 1.9% against the dollar.

The political situation in South Africa has been “dominated by bickering. Zuma surprised the market with the reshuffle,” Matys said. The reshuffle could be interpreted as a presidential power play to show that his position is still strong, he added. Zuma’s second term ends in 2019.

Zuma’s grip on power in South Africa has been negative for the rand: “That is because South Africa hasn’t made a lot of progress with reforms, and Zuma is perceived as an obstacle,” Matys said.

Back in late March, the president ousted finance minister Pravin Grodhan, whose policies were perceived as pro-reform.

Turkey’s lira

Another CEEMEA currency that could weaken further is the Turkish lira, which hit a four-day low against the greenback on Tuesday. One dollar bought 3.6734 lira, compared with 3.6465 late Monday.

Also read: Turkish lira isn’t done underperforming, analyst says

“The lira continues to have political risk with regards to the Kurdish minority,” Matys said, referring to Turkey’s Kurds who are hoping for autonomy or independence, “and also the worsening relationship between Washington and Ankara.”

Both Turkey and the U.S. have stopped issuing nonimmigrant visas last week in reciprocal actions after a Turkish employee at the U.S. Consulate in Istanbul was arrested.

The Turkish lira has been the weakest emerging-market currency in October, so far, Matys said. It has slipped 3% against the dollar. Over the past nine months, the currency is down 4.1% against the dollar.