South Africa’s rand led gains across emerging market currencies on Friday, as it trimmed steep weekly losses on fears of civil unrest, while Turkey’s lira was among the top performers this week as low volatility favoured high-yielding currencies.
The rand rose 0.6%, but was set to lose more than 2% this week after a wave of violence tore across major financial hubs in the country. The currency was the worst performing emerging market (EM) unit this week.
Emerging market FX performance in 2021
MSCI’s currency index was set to snap a two-week losing streak, taking support from gains in the Chinese yuan. But a rise in Asian COVID-19 cases sullied broader sentiment, while fears of slowing growth kept risk appetite subdued.
Losses in Asian markets pushed MSCI’s index of emerging market stocks 0.5% lower. But the index was set to end the week about 1.8% higher, with a bulk of gains coming on assurances from the U.S. Federal Reserve Chair, Jerome Powell, that policy would stay accommodative.
Turkey’s lira rose about 0.4% on Friday, and was set to outpace its peers in Europe, the Middle East and Africa (EMEA) with a 1.3% gain.
The currency has been slowly rising since the central bank maintained interest rates this week and vowed to keep them there till inflation comes under control, although analysts argued more tightening was needed to rein in inflation.
Still, with the bank expected to maintain the status quo, volatility indicators on the lira hit a one-year low. And with benchmark rates at 19%, the lira is among the highest yielding currencies in the world.
But that yield comes with the risk of more government meddling in monetary policy, which has seen the lira plummet to record lows.
“The ‘tightness’ of the current stance remains questionable, in our view, and we think that the overall dovish nature of (the central bank’s) guidance is unjustifiable given the predominant upside risks to the inflation outlook,” Credit Suisse analysts wrote in a recent note.
In central Europe, the Polish zloty lagged its peers this week, as the country’s central bank held interest rates this week, in contrast to hikes in Hungary and the Czech republic.