Emerging-Market Week in Review: Fed Chair, Tax-Cut Guessing Game

(Bloomberg) -- The dollar’s loss was a gain for emerging markets.

Currencies in developing countries halted four weeks of declines, weathering geopolitical concern over Turkey’s spat with the U.S. and tensions on the Korean peninsula. The Bloomberg Dollar Spot Index snapped a four-week rally as confidence in American tax-cut plans ebbed. The MSCI Emerging Markets Index of shares posted a second weekly gain as investors continued to gauge the odds of a Federal Reserve interest-rate increase in December, while the focus on Fed Chair Janet Yellen’s replacement intensified.

Highlights for the week ended Oct. 13:

• U.S. and Turkish officials will meet in the coming days to try to defuse a diplomatic crisis over Turkey’s arrest of some U.S. citizens and local consular workers, Turkey’s Deputy Prime Minister Bekir Bozdag said
  • Earlier in the week, the nations suspended visa services for each other’s citizens
• Fed minutes showed there’s still caution over the timing of further interest-rate increases
  • U.S. inflation excluding food and energy rose 0.1% in September over the previous month, slower than consensus estimate of 0.2%, which led to a rally in stocks, bonds and commodities
• China needs to “comprehensively” push forward with opening its economy, yuan rate reforms and relaxing foreign-exchange controls, Chinese magazine Caijing reported, citing an interview with People’s Bank of China Governor Zhou Xiaochuan
• The fourth round of North American Free Trade Agreement negotiations opened in Washington and are expected to continue through Oct. 16

Asia:

• The Chinese yuan halted three weeks of declines ahead of the Communist Party Congress as speculation of a wider yuan trading band resurfaced after PBOC Governor Zhou’s remarks on foreign-exchange reforms
  • China’s Ministry of Finance said it would sell $1b of 5-year and $1b of 10-year dollar bonds in Hong Kong soon
• India consumer prices rose 3.28% in September from a year earlier, slower than the median estimate of 3.53% gain in a Bloomberg survey
• North Korea’s Foreign Minister Ri Yong Ho said Trump lit the “fuse of war” with his “belligerent and insane” statements at the UN, Russia’s state-run Tass news service reported
  • White House Chief of Staff John Kelly said the North Korea threat is “manageable” now, yet Americans “should be concerned about a state that has developed a pretty good ICBM capability and is developing a pretty good nuclear reentry vehicle”
• Philippine peso was the sole decliner among emerging Asia currencies in the week; President Rodrigo Duterte threatened to cut ties with the U.S. and European Union, saying he’s ready to drive ambassadors out of the country over their criticisms of his drug war

EMEA:

• The U.S. visa spat propelled Turkey’s lira to its biggest retreat since July 2016 on Monday; the currency recovered some of its losses to close down 0.6% in the week, its fifth such decline in a row and the longest stretch since January
• Kenyan opposition leader Raila Odinga said he won’t run in a new presidential election ordered by the Supreme Court, testing the limits of the East African nation’s constitution and the power of the judiciary
• Nigeria’s Fidelity Bank Plc sold the highest-yielding Eurobond from emerging markets this year
• South Africa’s rand added 3.5% in the week against the dollar, the best performance in emerging markets
  • President Zuma may face graft charges after a Supreme Court ruling; the decision was "very positive political news and might assist the rand," according to Wayne McCurrie, a portfolio manager at Ashburton
  • The Treasury has a lot of work to do to maintain the nation’s budget and spending framework, Finance Minister Malusi Gigaba said
• Russia’s ruble had its best weekly gain in six as crude, the nation’s main export earner, advanced; Brent climbed more than 2%
• The Polish zloty and Hungarian forint were the best performers in the week versus the euro and the dollar among emerging-market currencies after the rand 
• Saudi Arabia is considering delaying the international portion of the IPO of state oil company Saudi Aramco to at least 2019, according to people familiar with the situation.

Latin America:

• The Mexican peso extended a 4-week slide and approached the psychological 19-per-dollar level, the longest losing streak since January
  • U.S. negotiators presented a proposal for a so-called “sunset clause” that would see the North American Free Trade Agreement expire after five years unless the parties can agree to extend it, according to two people familiar with the talks
  • USD/MXN may trade above 20.50 if Nafta falls apart, Citigroup said in a Thursday note; peso may slide to 19.25 in six months, according to Wells Fargo
• Banxico minutes and comments from officials sent clear signals that policymakers are concerned about inflation and rate-hike option isn’t entirely off the table
  • Mexico’s swap rates soared after the remarks, pricing almost no chances of rate cuts, vs almost 40bps easing as of end-Sept.
• Peru’s sol rallied more than 0.6%, the biggest weekly advance since March amid copper price gains and after the central bank left the policy rate on hold Thursday
• S&P could downgrade Brazil if pension reform vote is delayed, Estado reported on Friday; Moody’s also sent a similar signal earlier in the week.

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To contact the reporters on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net, George Lei in New York at glei3@bloomberg.net, Alex Nicholson in Moscow at anicholson6@bloomberg.net.

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Alec D.B. McCabe