Emerging Currencies Advance as Weak U.S. Data Offsets BOJ Fizzle

Policy Decision: Did the BOJ Do Enough?
  • Sovereign-bond premiums narrow in July by most in four months
  • Stocks slip as declines in Asia offset gains in eastern Europe

Emerging-market currencies rose, extending their biggest year-to-date rally since 2011, as weaker-than-forecast U.S. economic reports buoyed optimism that central banks will extend looser monetary policies, supporting demand for riskier assets.

A gauge of developing-nation exchange rates extended an advance after data showed the U.S. economy expanded less than estimated in the second quarter and companies held back new investments. The South African rand and Brazilian real led gains. Russia’s ruble reversed a retreat. The MSCI Emerging Markets Index slipped as equity declines in Asia spurred by disappointment that the Bank of Japan didn’t go far enough to expand stimulus offset gains in eastern Europe and Africa.

The slip-up in the U.S. economy narrows room for the Federal Reserve to raise interest rates this year, after policy makers this week signaled the potential for a move. While Japan’s central bank didn’t deliver the big-bang stimulus package that some analysts had been expecting, it did expand its target for purchases of exchange-traded funds to 6 trillion yen ($58 billion) and doubled its U.S. dollar-lending program to $24 billion.

ETF Flows

“This week has seen a slightly more hawkish Fed and another disappointment from the BOJ, but still relatively relaxed emerging-market assets,” said Simon Quijano-Evans, a strategist at Legal & General Group Plc in London. “Major central banks are still pumping money out there. As a result, emerging-market fixed-income funds are facing record inflows that have to be invested, given they already have relatively high cash ratios.”

Investors poured in almost $6 billion in the past two weeks into U.S. exchange-traded funds buying emerging-market stocks and bonds amid speculation the uncertainty caused by the U.K.’s vote to leave the European Union will push central banks to delay the tapering of stimulus. While equities added $474 billion to their market value in July, sovereign-bond holders cut risk premiums on developing nations by the most since March.

The Bank of England has suggested it might cut rates in August. A majority of futures traders are betting the Fed won’t raise rates until July 2017.

Currencies

The MSCI Emerging Markets Currency Index rose 0.5 percent, pushing its gain for the week to 0.7 percent. The rand and real each strengthened more than 1.3 percent. The ruble added 0.9 percent. The Russian currency weakened earlier as the central bank held interest rates, citing risks to the inflation forecast, but later rose 0.9 percent.

Malaysia’s ringgit fell 0.5 percent as lower oil prices cast a cloud over the finances of Asia’s only major net exporter.

South African sovereign bonds due 2026 rose, sending the yields down nine basis points to 8.65 percent.

The premium investors demand to own emerging-market sovereign debt over U.S. Treasuries widened two basis points to 367, according to JPMorgan Chase & Co. indexes. The spread has narrowed 20 basis points this month, the most since March.

The MSCI Emerging Markets Index dropped 0.2 percent to 873.47. All but three of the 10 industry groups retreated. Equity gauges in China, India, Malaysia and South Korea each slid at least 0.2 percent.

Turkish stocks rose for a third day, with the benchmark index posting a 7.9 percent increase this week and paring losses in July.

Polish stocks posted their biggest drop in three weeks as the WIG20 Index slid 1.6 percent. A report showed second-quarter growth in the euro area, Poland’s biggest trade partner, slowed. The country’s equities are trading at the cheapest valuation since 2009 relative to emerging-market peers.

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