Most Emerging Currencies Bruised by Yellen as Rates Seen Rising

  • Currency gauge set for biggest monthly drop since August
  • Credit Agricole says Fed will be less supportive of EMs

Most Emerging-market currencies fell, extending their worst monthly decline since August, as mounting signs the Federal Reserve will raise interest rates in June or July diminished the allure of higher-yielding assets.

Asian currencies led the retreat after Fed Chair Janet Yellen said the strengthening U.S. economy would probably warrant an increase in borrowing costs “in the coming months.” The rand depreciated for a second day and China weakened the yuan fixing as the Bloomberg Dollar Spot Index extended its biggest monthly advance since September 2014. Bucking the trend, Brazil’s real rose after a higher than expected primary surplus in April and the ruble strengthened as crude advanced in New York. The closure of U.K. and U.S. markets for holidays diminished trading volumes.

Fed Funds futures jumped on Friday after Yellen’s comments supported the possibility for one to two U.S. rate increases this year, with odds of a hike by the end of July climbing to 59 percent on Monday from 26 percent at the start of May. Developing-nation shares have fallen in five of the past six weeks as investors shifted out of riskier assets, paring the MSCI Emerging Markets Index’s 2016 gain to 1.8 percent.

“People are digesting Yellen’s speech,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole CIB in Paris, who recommends selling high-yielding developing-market currencies such as the rand against the dollar. “There’s been a repricing of Fed rate-hike expectations, so the environment will be less supportive for emerging markets in the days ahead."

For details on Yellen’s comments in favor of a near-term rate hike, click here.

Yellen will host her colleagues on the Federal Open Market Committee in Washington on June 14-15, when they will contemplate a second interest-rate increase following seven years of near-zero borrowing costs that ended when they hiked in December.

Currencies

The MSCI Emerging Markets Currency Index declined 0.4 percent by 4:08 p.m. in New York and is down 3 percent in May, on course for the first monthly weakening since January. The won, the biggest decliner among 24 emerging markets tracked by Bloomberg, retreated 1.1 percent and is Asia’s worst performer this month after Malaysia’s ringgit.

For more on the rout in Asian currencies, click here.

The yuan fixing was cut by 0.45 percent versus the greenback, sending the Chinese currency to a four-month low. The exchange rate headed for the steepest monthly decline since the August devaluation in onshore trading. The ringgit depreciated 0.9 percent, bringing May’s rout to 5.2 percent.

South Africa’s rand lost 0.6 percent versus the dollar. The currency’s 10 percent drop in May is the worst in emerging markets, followed by the Colombian and Mexican pesos.
The ruble stemmed two days of declines and advanced 0.3 percent against the dollar as crude prices advanced 0.3 percent in New York. Fighting flared up near Libya’s main crude shipping port and OPEC delegates plan to meet this week in Vienna to assess output.

Brazil’s real outperformed emerging market currencies, rising 0.8 percent, after the country posted a surprise primary surplus in April.

Bonds

Fixed-income markets joined the regional slide in currencies, with bonds in Mexico, South Africa, Turkey and Poland declining. The Bloomberg Emerging Market Local Sovereign Index has fallen 2.4 percent in May, also the most since August. Bonds in developing countries are likely to lose their appeal when the Fed raises rates, with yields on Treasuries due in a decade unchanged at 1.85 percent on Monday.

The yield on Mexico’s government bonds in pesos due in 2024 advanced two basis points to 6.01 percent, while South Korea’s 10-year bond yield rose three basis points to 1.81 percent and Malaysia’s climbed three basis points to 3.93 percent.

Stocks

The MSCI Emerging Markets Index and Brazil’s Ibovespa both fell 0.1 percent extending their declines in May to 3.9 percent and 9.1 percent, respectively. All 10 constituent industry groups bar one in the MSCI have lost ground since the end of April, with materials and energy stocks falling the most. The emerging-markets measure is trading at 11.6 times projected 12-month earnings, below the MSCI World Index’s multiple of 16. Trading volumes on the index were about 60 percent of normal, according to data compiled by Bloomberg.

In Brazil, Marfrig Global Foods SA led losses, falling 3.3 percent, while insurer and benefits provider Qualicorp SA rose the most, with a 4 percent gain. Petroleo Brasileiro SA gained 1.8 percent.

Mexico’s IPC index falls 0.2 percent, ending 6 days of gains, while the Hang Seng China Enterprises Index of mainland companies traded in Hong Kong advanced 0.3 percent to a three-month high.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE