Emerging Currencies Slump on Fed Outlook After U.S. Wage Data

  • Gauge of developing-nation exchange rates halts two-day gain
  • Stocks little changed with eight of 10 industry groups lower

Emerging-market currencies weakened against the dollar for the first time in three days as signs of accelerating U.S. wage growth bolstered the case for further Federal Reserve interest-rate cuts.

A gauge of 20 developing-nation exchange rates dropped 0.4 percent, reducing its five-day gain to 0.6 percent. Chile’s peso led declines on Friday, falling 1.1 percent. South Africa’s rand slid 1 percent from a one-month high. The real slumped amid speculation Brazil will abandon its fiscal target this year and slow the pace of spending cuts. Stocks were little changed, with the MSCI Emerging Markets Index posting its first weekly decline since mid-January.

Emerging-market assets retreated Friday as U.S. Labor Department report showed employers added 151,000 workers in January, and hourly earnings rose more than estimated. The jobless rate fell to the lowest level since February 2008. While the data boosted chances of a rate move, most Fed funds futures expect policy makers to hold off until late this year or early in 2017. The dollar pared its weekly drop after the report.

“I see the payrolls data as a small negative for emerging markets because it reminds investors that the U.S. labor market is still in good shape,” said Koon Chow, a strategist at Union Bancaire Privee Ubp SA in London. “The U.S. remains the marginal key driver of global growth right now and this should percolate towards dollar strength.”

Currencies

The South Korean won strengthened 0.4 percent amid dollar inflows. Foreigners bought $97.4 million more of local stocks than they sold this week. The currency has declined 2.1 percent this year, Asia’s worst performance after India’s rupee. Local markets are shut Feb. 8-10 for holidays.

The ruble weakened 0.7 percent versus the dollar after swinging between gains and losses. Brent crude dropped 40 cents to $34.06 a barrel, pushing the weekly decline to 2 percent. The 120-day correlation between oil and Russia’s currency is at a record, with the two assets moving in tandem 79 percent of the time.

The real fell 0.4 percent. Concern that Brazil will abandon its fiscal targets resurfaced Friday as newspaper Folha de S. Paulo reported that the Finance Ministry is considering bringing forward a proposal to make them more flexible. Standard & Poor’s and Fitch Ratings cut the country’s credit rating cut to junk last year because of low growth, fiscal concerns and the political outlook as President Dilma Rousseff struggled to fend off impeachment.

Stocks

The MSCI Emerging Markets Index rose less than 0.1 percent to 739.61, with eight of its 10 industry groups declining. The benchmark was declined 0.4 percent this week. The Shanghai Composite Index fell 0.6 percent to pare its five-day gain to 1 percent. The

Sentiment toward developing-market stocks was bolstered this week as the People’s Bank of China pumped four times as much cash into the financial system than it did in 2015 to ease pressure on the money markets before next week’s lunar New Year. China also relaxed restrictions on foreign funds as it seeks to gain entry to MSCI Inc.’s global stock indexes.

The Jakarta Composite Index rallied 2.9 percent as better-than-expected economic growth spurred local lenders. The Philippine stock benchmark climbed 1.7 percent, while India’s S&P BSE Sensex Index added 1.1 percent.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed one basis point to 472, according to JPMorgan Chase & Co. indexes.

India’s sovereign bonds rose, pushing the 10-year yield down by the most in two weeks, after the central bank said it will buy more debt through its open-market operations. The Reserve Bank of India will purchase as much as 100 billion rupees ($1.5 billion) of notes on Feb. 8, according to a statement Thursday.

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