Emerging-Market Currencies Post Weekly Gain as Rand, Lira Rally

  • Slow pace of U.S. rate increases would support risk demand
  • MSCI Emerging Markets Index halts three-day Fed-driven rally

Emerging-market currencies posted a weekly gain as investors increased bets that the Federal Reserve will raise U.S. interest rates gradually, supporting demand for riskier assets.

A gauge tracking 20 developing-nation exchange rates climbed 0.4 percent in the five days through Friday. South Africa’s rand was the best performer, rising 5.4 percent against the dollar, followed by a 2.6 percent gain in Turkey’s lira. Stocks halted a three-day rally on Friday, paring their first weekly advance this month. The Micex Index fell the most since March as lender Sberbank PJSC and energy companies slumped. Oil, Russia’s biggest export, sank to the lowest since 2008. Samsung SDI Co. tumbled the most since July after Dongbu Securities Co. forecast the company will report a fourth-quarter operating loss.

Emerging markets got a reprieve this week as investors who fled in the run-up to Wednesday’s Fed move returned to take advantage of valuations about 30 percent cheaper than developed markets. The focus is shifting to the pace of future U.S. rate increases and the monetary policy divergence with developing economies such as China and India, where further easing is expected.

“While the Fed has signaled gradual increases, there are a few people who are saying there’s the possibility that adjustments will be faster," said Rafael Palma Gil, who helps oversee about $1.8 billion as a trader at Rizal Commercial Banking Corp. in Manila. "We remain cautious and selective, picking names that delivered earnings at least within expectations."

The MSCI Emerging Markets Index is headed for the worst annual performance since 2011 and the currency measure is set for its biggest slide since 1997.

Stocks

The MSCI gauge fell 1.1 percent to 789.71 on Friday. All 10 industry groups fell Friday, led by energy companies as Brent crude sank to less than $37 a barrel. Cnooc Ltd. and PetroChina Co. lost at least 1.8 percent in Hong Kong. On Russia’s Micex, Gazprom PAO and Lukoil PJSC each fell more than 4 percent.

The developing-nation equity benchmark is on course for a 17 percent slide in 2015, which has driven the average valuation of its companies to 11 times projected 12-month earnings, compared with a multiple of 15.5 for MSCI World Index of developed-nation equities, according to data compiled by Bloomberg.

Friday’s losses spread to Brazil, South Africa and Indonesia, where stock indexes fell at least 1.9 percent. The Shanghai Composite Index completed its biggest weekly gain in more than a month, paced by property developers, after data showed home prices increased in more cities.

Currencies

The 20-member currency gauge posted its second weekly advance this month. It tumbled 2.2 percent last week as OPEC’s decision to abandon a strategy of limiting production to control prices sparked a selloff in currencies of commodity countries like Russia. Local drivers -- such as a government shake-up in South Africa and Argentina’s decision to let its peso trade more freely -- also spurred a rout in emerging-market currencies. Brazil’s real headed for a second weekly drop after the country was handed its second junk rating this week.

Asia Forecast

The Fed’s move to increase U.S. borrowing costs for the first time in almost a decade on Wednesday brought relief to riskier assets that had been dumped for months in anticipation of the move. This week, the rand rallied 5.5 percent, Mexico’s peso gained 2.3 percent and the Turkish lira strengthened almost 2.5 percent.

Malaysia’s ringgit appreciated 0.5 percent on Friday and Indonesia’s rupiah added 0.7 percent, both "capitalizing on the weakening of the dollar,” according to Mitul Kotecha, head of Asian foreign-exchange and interest-rate strategy at Barclays Plc in Singapore.

South Korea’s won fell 0.3 percent as a weakening yuan damped the nation’s export outlook. The People’s Bank of China cut the yuan’s reference rate for a 10th day on Friday and the currency has weakened 1.3 percent this month. China is South Korea’s biggest overseas market.

All ten major Asian currencies are forecast to decline against the dollar in 2016 as China’s growth slowdown hurts Asian nations with strong trade linkages, Barclays’ analysts including Kotecha said in a note dated Thursday.

Bonds

Government bonds rallied in China, South Korea and Taiwan on Friday amid subdued growth prospects. China’s 10-year sovereign yield fell three basis points to 2.95 percent, according to National Interbank Funding Center prices.

In emerging Europe, Hungarian bonds led gains after the central bank’s vice president said the authority will take “big step” in its planned unconventional monetary easing in early 2016. The yield on 10-year debt fell 14 basis points to 3.48 percent.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened three basis points to 418 on Friday, trimming this week’s decline to six basis points, according to JPMorgan Chase & Co. indexes.

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