Emerging Currencies Gain as Yellen Signals Gradual Rate Policy

Will the Fed Continue Hiking?
  • Argentina's peso leads rally; Russian ruble advances with oil
  • Developing-nation stocks rise for first time in three days

Argentina’s peso led gains in emerging-market currencies and stocks ended a two-day decline as Federal Reserve Chair Janet Yellen suggested that the central bank might delay interest rates hikes, helping bolster demand for riskier assets.

A gauge of 20 currencies rose for the first time in four days. Stocks in Hungary and the Czech Republic led the rebound in equities. Shares in India fell to the brink of a bear market, while most Asian bourses remained closed for lunar New Year holidays. Turkish bonds gained and sent 10-year yields down the most in a week. The premium investors demand to own developing nation debt over U.S. Treasuries fell from the highest since 2009.

Currencies rebounded as Yellen reiterated the Fed’s intention to raise borrowing costs gradually, while being non-committal on whether the U.S. would follow other central banks’ footsteps in pushing rates below zero if the economy significantly worsened. Concern that global growth is faltering spurred a selloff that’s erased almost $8 trillion from the value of global equities this year and prompted the Bank of Japan’s shift to negative rates in late January and the European Central Bank to signal it will deploy new stimulus next month.

“It seems much more unlikely that the Fed will materially raise interest rates this year due to the global market turbulences and a bleaker outlook on growth,” said Bernd Berg, an emerging-market strategist at Societe Generale SA in London. “In my view, the market will further price out any rate hike expectations if the global turbulences do not abate.”

Fed Outlook

Futures traders, who predicted a more than 50 percent chance of a rate increase in March at the end of last year, now see less than 30 percent odds borrowing costs will rise this year. Yellen said in testimony Wednesday to the House Financial Services Committee that conditions in the U.S. have become less supportive of growth,

The gauge of 20 developing-nation currencies rose 0.3 percent Wednesday, led by a 1.4 percent gain in the Argentine peso. Russia’s ruble strengthened 1.4 percent as Brent crude increased 2.2 percent, ending a four-day drop. Brazil’s real weakened 0.6 percent.

Relative Valuation

In Asia, Malaysia’s ringgit climbed 1.2 percent versus the dollar. The rupiah added 1.1 percent after an Indonesian central bank official said the monetary authority sees room for easing and that growth can be higher in 2016 after expansion. The country is considering opening up previously closed sectors of the economy to foreign capital to drive economic growth, Trade Minister Tom Lembong said in an interview Tuesday.

The MSCI Emerging Markets Index rose 0.1 percent to 730.58, with five out of 10 industry groups advancing. The measure has retreated 8 percent this year and is valued at 10.7 times projected 12-month earnings of its members, compared with a multiple of 14.3 for the MSCI World Index of developed markets, which has declined 11 percent in 2016.

Markets in Hungary and the Czech Republic advanced more than 1.2 percent, while Poland’s benchmark WIG20 Index retreated 0.3 percent. The Ibovespa dropped 0.5 percent as economists forecast a deeper recession in Brazil this year.

India Slump

India’s S&P BSE Sensex retreated 1.1 percent to the lowest since May 2014, extending losses since its record in January 2015 to almost 20 percent. State Bank of India sank 4.8 percent and the cost of insuring its bonds against default climbed to the highest since 2014 before the nation’s largest lender reports quarterly earnings on Thursday amid concern over worsening asset quality.

Ukraine bonds fell after International Monetary Fund Managing Director Christine Lagarde said she was concerned about the slow pace of reform. The yield on the bond maturing September 2025 climbed to 10.6 percent, the most since it was issued in May 2014.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened three basis points to 497, according to JPMorgan Chase & Co. indexes.

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