BRIC currencies will recover heavy recent losses: Survey

All four BRIC currencies, the Brazilian real, Russian rouble, Indian rupee and Chinese yuan, will recoup at least some of their recent heavy losses over the next 12 months, a Reuters poll showed on Wednesday.

The latest Reuters BRIC FX survey showed the real, rouble and rupee recovering slowly after diving more than 10 percent against the dollar over the last three months, as low borrowing rates in sluggish developed economies force investors to seek yield in dynamic emerging markets.

The rouble and rupee, will take the lead, expected to gain more than five percent and six percent, respectively, according to the median estimate of around 70 analysts, economists and strategists polled by Reuters. The yuan is expected to rise more than 4 percent and real only about 2 percent over the next year.

The outlook for the rouble and real has taken an about turn since the last poll in July, when strategists predicted falls for the currencies over a 12 month horizon.

For the current consensus to come true, however, Europe will have to solve the crisis, said Win Thin, global currency analyst with Brown Brothers Harriman, the largest privately owned U.S. bank, in New York. That looks far from certain right now.

"The BRICs are vulnerable to a big blow-up if Greece defaults and Europe melts down, but the emerging markets always come back and right now they just offer more promise than developed markets," he said. "Once the dust settles it seems like the natural flow will be to the BRICs and other emerging markets," said Thin, whose bank expects emerging markets to strengthen over the next year.

For all the currencies but the yuan, the threat of a Greek default and resulting withdrawal of funds from higher-risk emerging markets to lower-risk dollar investments has led to sharp losses in recent months. The rouble  also weakened after S&P downgraded the U.S. sovereign debt rating in early August.

However, with Brent crude oil  still above $100 per barrel, the Russian central bank has sold more than $10 billion of dollar reserves since early September, helping the rouble to bounce back versus the greenback from 32.90 -- its weakest level since August 2009. Oil and petroleum products are Russia''s main export.

The rouble recovery may begin soon, with the currency expected to rise about 2.2 percent to 31.43 to the dollar by year-end, according to the poll. "On the one hand, there''s the factor of capital outflow which is unlikely to vanish in the fourth quarter. But on the other hand, there is still a strong capital account surplus," said Julia Tsepliaeva, chief economist for Russia and CIS at BNP Paribas in Moscow. "The external background will favour appreciation in the rouble ... but until the capital outflow trend changes there will be no solid result, and volatility will be high."

Gains may be limited by Russia's need to make $38 billion of foreign debt payments in the fourth quarter, payments that will reduce the net capital inflow and add to pressure for the rouble to weaken.

RUPEE TO ROAR BACK                                            
The partially convertible Indian rupee is set to reverse its losing streak and gain more than six percent over the next twelve months as investors develop an appetite for risk.

It has lost close to 12 percent to the U.S. dollar since the start of this year and hit a 28-month low of 49.885 on September 23, a month when it depreciated seven percent as it hit a wave of sellers intent on dumping risky assets and returning to safe haven investments.

"The rupee remains vulnerable versus the majority of the rest of Asia due to its ongoing current account funding requirement," said Paul Mackel, head of asian foreign exchange research at HSBC, in a note to clients. "While the rupee will continue being one of the most vulnerable to current hostile market conditions ... the rupee could be one of the largest beneficiaries, if the global risk environment stabilizes and improves."

PRESSURE ON YUAN TO RISE
The yuan, still heavily controlled by the Chinese government, will continue its steady and slow appreciation under the prevalent system of regular intervention to prevent large swings in the currency, Thin said.

Strategists now forecast the yuan to appreciate to 6.30 in three months, 6.24 in six months and 6.11 in a year compared to 6.40, 6.30 and 6.20 in the July Reuters poll. The gains may ease but are unlikely to end complaints by the U.S., Brazil and other countries that the yuan remains unfairly undervalued against the dollar, giving it an unfair trade advantage.

"The Chinese are willing to have some appreciation but not too much and in times of uncertainty will stop it altogether," Thin said. "It is not a free-floating currency by any means and will only really appreciate when the government wants it to."

Since revaluing its currency in 2005, the yuan has gained 30 percent against the dollar. But those gains were halted by the central bank during the 2008-2009 financial crisis and world recession.

The U.S. Senate on Tuesday approved a controversial bill to punish China over its currency in an effort to save American jobs, sending it to the House of Representatives where its fate is uncertain.

Additional pressure may even come from within China. A stronger yuan could help ease consumer price pressures by making imports of raw materials, and technology cheaper, especially if China does not suffer any kind of economic hard landing.

Brazil's real is expected to gain the least of the BRIC currencies after a roughly 16 percent slide since July, fuelled by the euro zone crisis, currency controls and a cutting of interest rates in August.

Analysts said that if China keeps growing, helping maintain high prices for iron-ore, soybeans, chickens and other commodity exports, and Europe avoids a meltdown, the real should start strengthening again. "Our feeling is that by the end of the year Europe will put its house in order and there will be less risk aversion and the real will appreciate," said Luciano Rostagno, head economist at CM Capital Markets in Sao.