Emerging market currencies firm but rising interest rate risks weigh on EM outlook

Rand flat.
Image: Bloomberg

Most emerging market currencies rose on Monday, taking support from a steady dollar, although a surprise jump in US jobs data last week bolstered bets for a more aggressive Federal Reserve, casting a pall over the outlook for emerging assets.

An index of emerging market currencies firmed 0.1% with the Chinese yuan edging higher on returning from a week-long Lunar New Year break.

The January payrolls report on Friday showed that the US economy created far more jobs than initially expected, creating room for a more aggressive tightening by the Federal Reserve in its March monetary policy meeting.

A higher interest rate regime in the US may lead to capital outflows and currency depreciation in emerging markets.

MSCI’s index of emerging market stocks slipped around 0.2%, after gaining 2.5% in the previous week, as some tech names faltered on rising risks about a faster pace of global monetary tightening.

Investors now look ahead to monetary policy decisions within emerging economies and smaller currency markets, with the Swedish, Russian, Polish, and Mexican central bank meetings due this week. Expectations are for the central banks to further hike rates and maintain their hawkish policy stance.

The Russian rouble rose 0.3% to a more than three-week high on support from elevated oil prices, but geopolitical pressures around Ukraine and the West simmered.

French President Emmanuel Macron is due to visit Moscow after speaking on Sunday with US President Joe Biden.

“Although the outcome of the current diplomatic efforts remain uncertain, markets have become increasingly confident that there is no significant risk of a severe escalation in the Russia/Ukraine crisis,” Pheonix Kalen, head of EM strategy at Societe General wrote in a note to clients.

The dollar index which pares the greenback against a basket of currencies, was steady ahead of inflation figures due later this week, which will likely cement expectations for a March Federal Reserve rate hike.

The Turkish lira firmed about 0.2%, while South Africa’s rand was flat.

Investors awaited December mining and manufacturing figures from South Africa and a State Of The Nation address by President Cyril Ramaphosa due this week. Ramaphosa typically uses the annual address to parliament to announce reforms in key policy areas.

Emerging currencies in Central and Eastern Europe also firmed against a weaker euro with Hungary’s forint, the Polish zloty and Czech crown all gaining between 0.1% and 0.3%.

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