A cashier counts out Turkish lira banknotes on the counter of a foreign currency exchange store in Istanbul, Turkey. (Photographer: Nicole Tung/Bloomberg)

Friend-or-Foe Fed Vexes Emerging Markets as Dollar Holds Sway

(Bloomberg) -- Emerging markets are heading toward the end of April with as many reasons to be optimistic as cautious.

While the high-riding dollar has exacerbated stresses in countries such as Argentina and Turkey, the prospect of an interest-rate cut this year by the Federal Reserve -- a key cause of the U.S. currency’s strength -- is leaving some of the biggest investors more upbeat about the outlook in the developing nations.

Emerging-market currencies as measured by an MSCI Inc. index had their worst week this year in the five days through April 26, putting them on course for a third month of declines, while gauges of stocks and bonds also retreated. Whether the selloff sets the tone for the next few months or turns out to be an aberration may rest largely on what signals the Fed gives about inflation in the world’s biggest economy when it concludes its two-day meeting Wednesday.

“Dovish G-10 central banks and market nervousness into month-end appear to have triggered another wave of U.S. dollar buying, which in the school of 2018 translates into emerging-market weakness, particularly in Argentina and Turkey,” said Anders Faergemann, a fund manager in London at PineBridge Investments, which oversees about $90 billion. “Altogether the global macro environment is still advocating a cruise-along scenario that should benefit risk assets such as emerging markets.”

Friend-or-Foe Fed Vexes Emerging Markets as Dollar Holds Sway

The Fed won’t have all the limelight. There’s another round of U.S.-China trade negotiations this week. And in emerging markets themselves, investors will be waiting for Turkey’s central bank to clarify what’s happening to its net reserves. Argentina will also be on the radar amid concern about President Mauricio Macri chances of losing the October election to his populist predecessor Cristina Fernandez de Kirchner.

Read: Goldman Sachs Asset ‘Opportunistically’ Trims EM Currency Wagers

Trade Back on the Radar

  • The focus will be back on the China-U.S. trade discussions in a holiday-shortened week for the Asian country
  • Negotiators led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing as both sides work toward a draft agreement by next month
  • Discussions will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement, according to a White House statement
  • “It’s time to consider taking some profits off the table especially as we get closer to the announcement of a deal,” Stefan Hofer, chief investment strategist in Hong Kong at LGT Bank AG, told Bloomberg TV’s Yvonne Man and Haslinda Amin. “Tactically, given the run that we’ve had, maybe now would be a good time to reassess”

Turkey’s Reserve Riddle

  • Investors will follow the central bank’s quarterly inflation briefing on Tuesday in anticipation of getting an explanation of what’s happening to international reserves
  • The central bank is due to shed light on billions of dollars of foreign-currency holdings that analysts have been struggling to keep track of this quarter, according to an official familiar with the regulator’s plans
  • The lira fell to the lowest level since October last week as policy makers backed away from a pledge to tighten rates if needed, even as inflation hovers around four times the central bank’s target rate

Argentine Activity

  • Argentina is set to release data on Tuesday showing economic growth recovered in February, but any relief may be overshadowed by expectations that activity sank again in March
  • The peso lost almost 9 percent of its value versus the dollar last week as investors reassessed whether market-friendly President Mauricio Macri can win re-election
  • The central bank will increase intervention in the foreign exchange market to make its monetary policy more restrictive, and will sell more dollars if the peso goes above the ceiling of the currency band, according to a bank statement published Monday
  • Read more: Argentina’s Roller-Coaster Week Reveals More Sharp Turns to Come

Brazil’s Bill, PDVSA Payment

  • Brazilian President Jair Bolsonaro’s all-important pension overhaul bill is churning its way through Congress, where a lower house special committee will start analyzing it as soon as Thursday. Signs of progress boosted Brazilian assets last week
  • Venezuela’s opposition-led National Assembly votes Tuesday on whether to make a $71 million interest payment on PDVSA’s 2020 bond, the only one not yet in default

Economic Data:

  • China will report on various measures of manufacturing PMIs for April, giving markets the first indication of how it’s stabilizing in the second quarter on the back of policy support measures. The world’s second-largest economy grew much more than forecast in the first quarter, at 6.4 percent from a year earlier
  • Taiwan will release preliminary first-quarter GDP figures on Tuesday
    • “The critical question is whether a recession is around the corner,” after South Korea was the first in Asia to report quarterly GDP contraction in the first three months, Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note.
  • Mexico releases preliminary GDP figures for the first full quarter under President Andres Manuel Lopez Obrador on Tuesday. Economists want to see how much growth slowed as a guide for the nation’s performance for the rest of the year. The peso is the best-performing emerging-market currency this month

©2019 Bloomberg L.P.