Emerging-Market Currencies Set for Best Month in 18 Years on Fed

  • Yellen comments support share surge, rand leads currencies
  • Stocks head for biggest monthly gain since October 2011

What Uncertainty in Emerging Markets Means for Investors

It’s been at least 18 years since emerging-market currencies had it this good as the Federal Reserve adopted a gradual approach to its rate-increase cycle, fueling optimism that capital inflows can be sustained.

A Bloomberg gauge of 20 currencies gained for a fourth day after Fed Chair Janet Yellen said that policy makers would act “cautiously” as they look to raise borrowing costs. Stocks rallied, sending shares in Shanghai up the most in a month, while South African equities rebounded from a two-week low and Russia ended the longest run of losses since 2011. The premium investors demand to hold emerging-market debt dropped from the highest since March 16.

“Yellen’s comments were pretty aggressive and make it clear that rate hike expectations might as well be scratched out for this year,” said Nathan Griffiths, a senior emerging-market equities manager who helps oversee $1.1 billion at NN Investment Partners in The Hague. “This is the perfect backdrop for emerging markets to continue” the rally because positioning remains geared to a rising dollar, he said. 

Brazil, South Africa, Russia and Turkey will probably benefit most from a weaker dollar, Griffiths said. 

Fed Comments

Developing-nation assets have advanced this month after the Fed at its March meeting reigned in forecasts for higher U.S. borrowing costs amid concern over turmoil in global markets. While Yellen reasserted that stance on Wednesday, hawkish comments from other Fed officials had spurred traders to raise bets for interest-rate moves this year. Stocks and currencies of commodity producers also got a boost from gains in prices for crude oil and metals.

The gauge of 20 developing-nation currencies rose 0.6 percent, extending the advance in March to 5.5 percent. The index last rose 5.5 percent in February 1998.

South Africa’s rand and Malaysia’s ringgit topped the daily moves on Wednesday, each strengthening 1.6 percent against the dollar.

EPFR Global data showed $2.9 billion flowed into stocks in developing countries in the week to March 23 alone, the most since July. That’s supported strength in exchange rates, with all of the 24 associated currencies appreciating in March.

Brent crude rose 12 cents to $39.26 a barrel in London Wednesday, pushing its gain this month to 9 percent. A Bloomberg index of raw materials slipped 0.5 percent, trimming its gain for March to 3.9 percent.

Stock Rally

The MSCI Emerging Markets Index rose 2.4 percent to 833.98, the steepest increase in almost two weeks. The gauge has climbed 13 percent in March, the most since October 2011. All 10 industry groups rallied Wednesday, led by energy and material stocks.

The Shanghai Composite Index gained 2.8 percent on Wednesday, the biggest increase since March 2, as companies including Bank of Communications Co. and China Petroleum & Chemical Corp. reported better-than-expected earnings. The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong added 2.9 percent.

Benchmark gauges in Abu Dhabi, Dubai, India and South Africa climbed at least 1.3 percent. Russia’s Micex Index rose for the first time in eight days, advancing 1.2 percent. The Ibovespa gained 0.2 percent in Sao Paulo.

Government bonds rose, with the yield on Russia’s five-year note falling nine basis points to 9.24 percent. The extra yield investors for emerging market debt over Treasuries declined five basis points to 412, according to JPMorgan Chase & Co. indexes.

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