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EM-Rising global yields weigh on emerging currencies, stocks gain

Emerging stocks enjoyed another day of healthy gains on Wednesday but currencies made little headway against a softer dollar.
Image: AdobeStock

Emerging stocks enjoyed another day of healthy gains on Wednesday but currencies made little headway against a softer dollar as the prospect of rising interest rates in major economies dampened appetite for risky assets.

MSCI’s gauge of emerging market equities climbed 0.4% and hit its highest level in five weeks amid healthy gains in Asia, especially Hong Kong’s tech sector , on the back of earnings optimism.

Meanwhile, many developing currencies struggled to gain ground as rising benchmark treasury yields sapped appetite for riskier assets.

“Expectations of higher interest rates in developed markets take the steam out of the hunt for yield,” said Ulrich Leuchtmann, head of FX at Commerzbank in Frankfurt.

“It will be difficult for emerging markets to match those increases – they are simply not as far along in the economic recovery in the wake of corona.”

MSCI’s index of emerging currencies edged 0.1% higher. China’s yuan lost its session gains to fall 0.2% after rising to its highest against the US dollar in nearly five months. China maintained its benchmark lending rate for corporate and household loans for an 18th month at its October fixing on Wednesday, matching market expectations.

Turkey’s lira dropped as much as 0.7% and flirted with record lows before retracing some of its losses as investors brace for more interest rate cuts at a central bank meeting on Thursday.

Currency of oil exporter Russia weakened 0.3% as crude prices slipped and after Moscow imposed new Covid curbs on Tuesday as record daily deaths. Data out on Wednesday showed oil supplies from Russia also fell 18% year-on-year to 6.14 million tonnes in September.

However, South Africa’s rand strengthened 0.3% as its September consumer price inflation (CPI) nudged up to 5% from 4.9% year-on-year. Inflation is still within the South African Reserve Bank’s target range of between 3% and 6%.

A Reuters poll of economists predicted the Federal Reserve will wait until 2023 before raising interest rates, though analysts flagged persistently higher inflation as a risk to the US economy.

If inflation keeps rising at its current pace in the next few months, Fed policymakers may need to adopt “a more aggressive policy response” next year, Fed Governor Christopher Waller said on Tuesday.

In emerging Europe, the Hungarian forint extended its losses and fell to a six-month low against the euro after the central bank’s 15-basis-point rate hike on Tuesday disappointed some investors. Policy makers had slowed the speed of the tightening cycle in September despite raising its inflation forecasts.

Poland’s zloty was treading water against the euro after producer price inflation rose to 10.2% in September year-on-year, faster than expected.

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