Emerging Currencies Rise Most in Two Weeks in Fed Relief Rally

What's the Appeal of Emerging-Market Currencies?
  • South Korean won climbs to strongest level since October
  • Russian ruble, Mexican peso retreat as crude prices decline

Emerging-market currencies rose the most in two weeks and bonds gained after the Federal Reserve signaled it’s in no rush to raise interest rates, ensuring that money will keep flowing to higher-yielding assets.

South Korea’s won closed at a nine-month high and Malaysia’s ringgit advanced the most since July 11 after the Fed upgraded its assessment of the U.S. economy but stopped short of indicating an increase in borrowing costs could come as soon as September. The Hungarian forint led gains in developing Europe. The Russian ruble weakened as oil fell to a three-month low. The real dropped after Brazil’s central bank sold reverse swaps contracts, a move equivalent to buying dollars in the futures market.

The U.S. central bank has adopted a more dovish tone since Britain’s vote to leave the European Union raised risks for the world economy, helping to sustain a rally in emerging-market assets that started in January. Investors pumped more than $5.8 billion into exchange-traded funds that buy developing-market stocks and bonds over the last two weeks, a record for the period, as a majority of futures traders expect no Fed rate increase until March.

“The Fed is factoring the Brexit risk and they don’t want to make any policy mistakes,” said Regis Chatellier, a strategist at Societe Generale SA in London, who is buying Latin American bonds. “As far as emerging markets are concerned, no hike means the bias is still bullish.”

The Fed’s statement on Wednesday pointed toward an eventual rate increase while still giving the authority room to defer a rise should U.S. indicators slump or if the global situation deteriorates. Futures contracts show a 43 percent chance of a U.S. rate increase by December, compared with 49 percent before the statement. The market’s attention will now turn to the Bank of Japan, which is expected to ease further at the end of its two-day meeting on Friday.

Currencies

The MSCI Emerging Markets Currency Index added 0.3 percent. A gauge of the dollar against major peers declined 0.1 percent, falling for a third day.

The won strengthened 0.9 percent and the ringgit advanced 0.8 percent. The onshore yuan climbed 0.2 percent as the People’s Bank of China raised the yuan fixing for a third day.

“People are happy to take emerging-market currencies a little bit stronger but know that the reason for the gains are a bit tired,” said Koon Chow, a London-based strategist at Union Bancaire Privee. “It may be better to have a positive exposure in emerging currencies on a correction, rather than to chase the rally from here.”

Currencies in countries dependent on commodity exports retreated. The ruble dropped 1 percent. Brent in rubles, an indicator of how much the government earns from each barrel of oil it sells, is near its lowest level since April and 10 percent less than the average price used to calculate the budget.

The real fell 0.9 percent. Brazil’s central bank placed all 10,000 reverse swaps contracts offered in an auction this morning, a move equivalent to buying $500 million in the futures market. The currency also dropped amid speculation banks are buying dollars in an attempt to control a central bank rate used in settling some financial contracts.

Bonds

The premium investors demand to own emerging-market bonds rather than U.S. Treasuries widened one basis point to 365, according to JPMorgan Chase & Co. indexes.

The yield on Turkey’s five-year notes dropped 22 basis points to 9.60 percent, extending a 10 basis-point retreat on Wednesday. The rate on similar-maturity Russian bonds fell seven basis points to 8.77 percent.

The MSCI Emerging Markets Index rose 0.2 percent to 875.52. The Borsa Istanbul 100 Index advanced 0.2 percent as Turkish stocks recovered from a 13 percent slump last week.

Saudi stocks retreated for an eighth day, falling 1.5 percent to the lowest level in a month. Crude has declined 14 percent in July.

Hungarian stocks retreated 0.6 percent to the lowest level in eight days. Poland’s equity gauge fell 0.2 percent.

U.K. Prime Minister Theresa May will meet with her counterparts in Warsaw and Bratislava on Thursday as she seeks allies for her Brexit negotiations in countries already skeptical about aspects of European Union membership.

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