Rate-Hike Bets Offer Cushion After Emerging-Market Currency Rout

Emerging-market currencies could catch a breather following their biggest four-week slide in more than a year as investors bet on a more hawkish tone from central banks in the developing world.

Turkey and Brazil may deliver the Group of 20’s first rate hikes in 2021 this week, potentially lending support to two currencies caught in the crosshairs amid surging U.S. Treasury yields. In Washington, the Federal Reserve is expected to leave borrowing costs unchanged, though traders will parse any comments that may suggest concern over the recent bond-market volatility.

An MSCI Inc. gauge of developing-nation currencies extended its longest weekly slump since August 2019. Meantime, dollar-denominated debt declined for a fifth week, representing the worst retreat in more than five years. Still, emerging-market equities rebounded from their selloff after U.S. President Joe Biden signed a $1.9 trillion fiscal stimulus bill into law and the biggest exchange-traded funds dedicated to emerging-market stocks and bonds led another week of inflows to the asset class.

Rate-Hike Bets Offer Cushion After Emerging-Market Currency Rout

The current backdrop has parallels to 2010, when the global economy recovered from a deep crisis, commodity prices improved and the Fed stayed on hold, according to Goldman Sachs Group Inc. In that episode, central banks in the developing world started hiking rates to the benefit of their currencies.

“Simple historical analogues suggest that tighter monetary policy should support EM currency performance relative to peers,” Goldman’s London-based strategists Kamakshya Trivedi and Davide Crosilla wrote in a report.

Listen to the EM Weekly Podcast: Rising U.S. Yields; Central Bank Meetings

Central Bank Watch

  • Policy makers in Indonesia and Taiwan will announce rate decisions on Thursday, just hours after the Fed. Both are expected to stick to the status quo amid recent market volatility
    • Bank Indonesia cut its benchmark rate to a record low of 3.5% at its last meeting in February amid concern a resurgence of Covid-19 cases would slow the economic recovery. The rupiah is one of the worst-performing currencies in Asia in the past month
    • February’s rate cut is likely to mark the end of BI’s easing cycle, United Overseas Bank said in a report
  • Taiwan’s central bank, which meets quarterly, last lowered its benchmark rate in March 2020 by 25 basis points to a record low of 1.125%. The Taiwanese dollar is Asia’s best performer this year
    • Taiwan’s policy makers will keep their key rate unchanged as a recovery is underway and domestic liquidity conditions are already supportive, according to Australia & New Zealand Banking Group Ltd.
  • Policy makers in Turkey are expected to boost the key rate by 100 basis points on Thursday to rein in inflation, according to almost all of the economists surveyed by Bloomberg
    • Turkish inflation accelerated for a fifth month in February amid a rally in oil prices
    • The lira has the second-highest one-week implied volatility among emerging-market peers
  • Brazil’s central bank will probably begin a tightening cycle as inflation accelerates. Swap rates price in a half-percentage-point rate hike and some traders are betting on a 75 basis-point move
    • It would be the first rate increase since 2015. The decision will be key for the real, which policy makers have been propping up through market interventions
    • Investors will also watch for updates on fresh emergency cash handouts as the Covid-19 pandemic accelerates and local governments reimpose some restrictions
  • The Bank of Russia is expected to hold its key rate unchanged on Friday, according to the majority of economists surveyed by Bloomberg
    • Still, the monetary regulator is considering moving faster than previously signaled to tighten monetary policy and may bring its key interest rate up by 125 basis points or more before the end of the year, according to a person with knowledge of the discussions
    • The ruble is the best-performing emerging-market currency this month to date
  • The Central Bank of Egypt is expected to hold its deposit rate unchanged on Thursday

U.S.-China Meeting

  • U.S. Secretary of State Antony Blinken and President Joe Biden’s national security adviser Jake Sullivan will hold talks with China’s most senior foreign policy official, Yang Jiechi, and foreign minister Wang Yi, in Anchorage
  • The Biden administration has signaled it will maintain the tough U.S. stance toward China. At the same time, officials have said they want to cooperate on issues such as climate change. Blinken has said the U.S. approach to China will be “competitive when it should be, collaborative when it can be and adversarial when it must be”

Other Key Data

  • China data released Monday show eye-popping growth rates of more than 30% for industrial production, retail sales and fixed asset investment, though the data were distorted by comparisons from a year ago when the economy was virtually shut down
    • The yuan has been comparatively stable this year, with a gain of about 0.4%
  • Also on Monday, China’s central bank announced the rate for its medium-term lending facility, a major open-market operation tool, remains unchanged. It last cut the level in March 2020, to 2.95% from 3.15%
  • Indonesia reported trade statistics on Monday, showing exports jumped a better-than-forecast 8.6% in February and the trade surplus widened
  • India’s trade deficit narrowed more than economists expected in February
  • The Philippines released January data on Monday showing overseas workers’ remittances fell 1.7% from a year earler, a smaller decline than economists estimated. The pandemic saw the amount repatriated fall last year for the first time since 2001
    • The government will publish balance-of-payments figures for February on Friday
  • South Korea will post February unemployment data Wednesday after the jobless rate jumped to a 21-year high of 5.4% the prior month
  • A reading of Chile’s fourth-quarter gross domestic product, scheduled for Thursday, will be watched for fresh information on how the economy is emerging from the pandemic. The nation’s vaccine rollout is the fastest in Latin America, though its success has been marred by a spike in cases
  • Colombia posted January retail sales figures on Monday, offering money managers a fresh look at activity; the nation will also release industrial production data
  • Uruguay is expected to release its fourth-quarter gross domestic product data, which may show some recovery from a steep contraction earlier in the pandemic

©2021 Bloomberg L.P.

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