Gloom Lifts From Emerging Currencies After Rate Hikes: EM Review

(Bloomberg) -- Emerging-market assets gained last week as Russia unexpectedly raised interest rates and Turkey hiked its one-week repo rate by more than forecast.

Highlights for the week ended Sept. 14:

• Turkey’s lira was the best performer among 22 emerging-market currencies tracked by Bloomberg; policy makers defied President Recep Tayyip Erdogan by jacking up rates more than expected to bolster the flagging lira, lifting rates by 625 basis points to 24 percent; the decision came just after Erdogan said the nation “should cut this high interest rate”
• Russia’s ruble flipped to gains from losses on Friday after the central bank unexpectedly raised interest rates for the first time since 2014; inflation risks have been mounting with a slumping currency and threats of U.S. sanctions
• President Donald Trump is said to have instructed aides to proceed with tariffs on about $200 billion of Chinese products, even as Treasury Secretary Steve Mnuchin proposed another round of trade talks with Beijing
• China’s economic momentum weakened a notch in August, with a continued slowdown in investment overshadowing solid retail sales and industrial production data
• The White House sent contradictory messages to North Korea, announcing it’s ready to start planning a second meeting with Kim Jong Un just hours after President Trump’s top national security adviser said nuclear talks were stalled

Asia:

• The onshore and offshore Chinese yuan both declined for a third week; more than 60 percent of U.S. businesses operating in China were hurt by the initial round of tariffs between the Chinese and U.S. governments, with 74 percent foreseeing harm from future U.S. tariffs and 68% from potential Chinese retaliatory duties, according to a survey of more than 430 American companies
  • S&P Global Ratings lowered its credit ratings on seven Chinese local government financing vehicles by one notch
• South Korean won strengthened; the country’s jobless rate rose to 4.2 percent in August, the highest since January 2010 and up from 3.8 percent in July; it will be difficult for the country’s job situation to improve in the short term
  • Prime Minister Lee Nak-yon said it is time to start thinking about rate increases
  • Demand-side inflationary pressure remains tepid and it’s "dangerous" to take preemptive monetary measures at this stage, Bank of Korea board member Shin In-seok said
  • The economy is continuing to recover, led by exports and domestic consumption, the finance ministry said in its monthly green book report
  • President Moon Jae-in asked heads of the country’s four biggest conglomerates -- Samsung, Hyundai Motor, SK, and LG -- to join his visit to Pyongyang to participate in the inter-Korean summit with North Korean leader Kim Jong Un next week, Chosun Ilbo reported
• India’s rupee dropped to a record low before trimming the week’s loss; the government unveiled measures to prop up the sagging currency, including steps to facilitate bond issuance by local companies and possible curbs on imports
  • Officials from the finance ministry have asked the Reserve Bank of India to do more to maintain adequate liquidity in the banking system, people with knowledge of the matter said
  • The nation’s inflation eased below 4 percent for the first time in 10 months
• The Indonesian rupiah posted its first weekly gain in five; Finance Minister Sri Mulyani Indrawati said authorities want to tighten some rules on exporters and are seeking a fair share of export earnings to be retained in the country
• Thailand’s SET Index of stocks rallied as King Maha Vajiralongkorn approved two laws, one for the election of members of parliament, and the other for the selection of senators, according to an announcement in the Royal Gazette
  • Thailand has no need to raise the key interest rate now as the nation’s inflation remains benign, Finance Minister Apisak Tantivorawong said
  • The government plans to borrow 1.16 trillion baht ($36 billion) in fiscal year 2019
• The Malaysian ringgit rose, halting a 12-week losing streak; the trade war may benefit Malaysia over the next year or so, especially in electronics and steel industries; in the long term, U.S.-China trade conflicts would be negative for the country, Finance Minister Lim Guan Eng said
  • Lim said Malaysia is paring expectations for how much money it can recoup from the 1MDB sovereign wealth fund, and the country would be “very lucky” to get back just half
  • Recouping all funds lost through 1MDB may not be possible as the government wouldn’t be able to sell assets at the purchase price and some funds have been squandered, Anwar Ibrahim, president-elect of ruling People’s Justice Party, said
  • Police are investigating bond sales and transactions by institutions linked to 1MDB, according to Deputy Inspector General Noor Rashid Ibrahim
• The Philippine peso weakened a fifth straight week, prompting the central bank to have reactivated a hedging program first introduced during the 1997 Asian Financial Crisis to support the peso; the program offers currency forward contracts to bank clients with foreign exchange obligations of at least $50,000
  • President Rodrigo Duterte agreed to nine measures to contain inflation and a corresponding executive order to implement them immediately, Economic Planning Secretary Ernesto Pernia said
  • First-half current-account deficit came in at $3.1 billion, compared with a $130 million shortfall a year ago

EMEA:

• Turkish lira advanced a second week; President Erdogan appointed himself chairman of Turkey’s sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction
  • Gross domestic product rose 5.2 percent during the three months through June from a year earlier
• Russia’s ruble halted a 3-week slump as policy makers said they’ll “consider the necessity of further increases” after lifting their benchmark to 7.5 percent, a level last seen in March, from 7.25 percent
  • Governor Elvira Nabiullina, who first broached the possibility of a rate hike earlier this month, said easing may not resume for more than a year
  • The two Russians accused by the U.K. of carrying out a nerve-agent attack on a former spy denied the charges in an interview with RT state television
  • Russia’s economy expanded faster than was earlier estimated in the second quarter
• South Africa’s rand strengthened; the country’s stable ratings outlook means there’s little chance of a change in its assessment soon, Moody’s Investors Service said
  • Business confidence declined to the lowest level this year as industries raised concern about policy uncertainty
  • South Africa may collect less revenue than forecast and trim its growth prediction for the year after the economy fell into a recession, Finance Minister Nhlanhla Nene said
• The Hungarian forint rose; the European Parliament adopted a recommendation to punish the country for the perceived erosion of the rule of law, a process that is still unlikely to yield concrete sanctions
  • Prime Minister Viktor Orban received an unprecedented EU censure as European lawmakers called for his government to face possible sanctions for eroding democratic standards
• Ukraine was given a boost in its fight with Russia over a defaulted $3 billion bond after the U.K. Court of Appeal ordered a full-blown trial
• Polish zloty climbed; the country’s Monetary Policy Council kept FX intervention as an option while maintaining a floating exchange rate, according to its policy guidelines for 2019 published on the parliament’s website
• Saudi Arabia is said to be raising about $2 billion from the sale of Islamic bonds
  • The nation’s sovereign wealth fund will sign an $11 billion loan, marking its first-ever borrowing, people familiar with the matter said
• Ghana’s long-term foreign currency debt rating was upgraded to B from B- by Standard & Poor’s

Latin America:

• The Brazilian real was the second worst performer; right-wing presidential front-runner Jair Bolsonaro underwent more surgery Wednesday evening after being stabbed on Sept. 6; Bolsonaro’s son said he is not in shape for the first round campaigning
  • Luiz Inacio Lula da Silva endorsed his running mate Fernando Haddad as the Workers Party’s candidate after electoral officials barred the imprisoned former president from running in the October vote
  • The latest XP/Ipespe poll published Friday showed Bolsonaro leading the pack with 26% support in a 1st round scenario, rising from 23% in prior survey; the former Ceara state Governor Ciro Gomes secured 12 percent while Fernando Haddad captured 10 percent voter support
• Argentina’s peso was the worst EM performer, setting a new record low on a closing basis as the IMF said it would delay a $3b disbursement to the nation until talks finish
  • The government is aiming to save 196 billion pesos ($4.9 billion) through spending cuts next year as it attempts to reach a fiscal balance, according to a report by La Nacion newspaper
  • August national consumer price index increased 3.9 percent in the month
• The Mexican peso was the best performer in Latin America, mostly tracking gains across emerging-market peers; Mexico is open to moving ahead with a bilateral trade pact with the U.S. if Canada can’t reach a deal on Nafta with the Trump administration, FT reported
  • President-elect Andres Manuel Lopez Obrador’s chief of staff Alfonso Romo said the new government will respect oil contracts and work with companies that already have contracts to achieve success; comments are reassuring to the market, according to a client note from Citigroup

Upcoming data:

--With assistance from Lilian Karunungan and Netty Ismail.

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, Charles Daly, James Amott

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