Forex traders bet on year-end EM rally Currency speculators are betting on an end-of-year rally in emerging markets, as the weak dollar fuels a revival of carry trades in higher yielding currencies. Long positions taken by macro hedge funds and commodity trading advisers in Asia-Pacific currencies are at the highest level since the start of 2012, according to a Citigroup analysis of trades by its clients. Citi has also found that long positions taken by these "active investors" in emerging markets currencies are at their highest level in a year, with funds betting on appreciation in a group of "commodity currencies." The swing in favour of riskier assets reflects expectations that the US Federal Reserve will now maintain its stimulus programme at least until the start of next year while it assesses the damage done by the US government shutdown. With the dollar close to a two-year low against a basket of currencies, dollar-funded investments in high yielding assets are more attractive. The rally also follows data suggesting China's economy picked up speed in the third quarter - although forex markets were rattled on Wednesday by reports of a fresh tightening in liquidity conditions in China. "The market can safely price the Fed to be on hold through the end of the year and potentially January," wrote strategists at Credit Suisse, noting that emerging markets had outperformed G7 currencies since the end of September. Some of the biggest gains have been in currencies that suffered heavy selling in July and August, as investors fled countries vulnerable to a sudden withdrawal of the Fed's "easy money." The Indonesian rupiah has gained more than 4 per cent against the dollar since the start of October, with the South African rand up more than 3 per cent, the Brazilian real 2 per cent and the Turkish lira 1.8 per cent. Trades in the Australian and New Zealand dollars, which offer the highest interest rates among the G10 group of liquid, rich country currencies, have also been popular. The Aussie - which suffered a four-month slide until the Fed's September decision to delay tapering - has risen 2.5 per cent against the dollar this month. Some think the shift in sentiment is sufficient to tempt back institutional funds who pulled out of emerging markets earlier in the year. We needed a big bang to see real money back in the game. We believe we just had it," wrote strategists at Citi. However, one big risk is that authorities forced to intervene to prop up their currencies over the past few months will now scale back their support. Traders are already nervous at hints by Brazil's central bank that it might not roll over all the $9bn worth of swaps due to mature at the start of November. India's central bank has trimmed its marginal lending rate since the rupee stabilised and Indonesia's central bank has stopped raising interest rates. Other governments have made it clear they would like to see a weaker currency to help exporters compete with regional rivals. The South Korean won hit a nine-month high on Wednesday, although traders believe the central bank has been intervening heavily in recent weeks to limit its appreciation. Moreover, many investors remain focused on the longer-term challenges facing emerging markets. "Growth is weak and fundamentals are shaky," argue strategists at Morgan Stanley, who say the recent price movements are more about dollar weakness and leave emerging market currencies exposed to any improvements in US data. They expect only a shortlived, tactical rally, saying: "Policy makers have not made the adjustments necessary to cater to a rebalanced global economy."