A financial trader speaks on a fixed line telephone while monitoring data on computer screens on the trading floor inside the Amsterdam Stock Exchange, operated by Euronext NV, in Amsterdam, Netherlands (Photographer: Jasper Juinen/Bloomberg)  

Is EM Currency Bounce a Blip? Traders Eye U.S. Rates for Clues

(Bloomberg) -- For all the concern that there’s a crisis brewing in some developing economies, emerging markets are showing resilience going into the final week of May, thanks to the dollar’s recent pause and a drop in U.S. yields.

That may all change should Friday’s payrolls data fan speculation that the Federal Reserve will accelerate the pace of interest-rate increases. But Turkey apart, investors are saluting a week in which emerging-market currencies had their biggest gain since March and local-currency bonds strengthened for the first time in seven weeks as U.S. 10-year yields slipped back below 3 percent. Still, stocks extended the previous week’s losses.

Is EM Currency Bounce a Blip? Traders Eye U.S. Rates for Clues

“The key driver for emerging markets will continue to be exogenous factors, in particular the performance of the U.S. dollar and U.S. rates, which have been key headwinds for our asset class in recent weeks,” said Paul Greer, a London-based portfolio manager at Fidelity International.

Purchasing managers’ indexes from across emerging markets will provide clues on the health of the global economy and influence policy makers’ thinking. Investors will also closely watch how central banks will respond to any return of currency weakness.

The lira was the world’s best-performing currency on Monday after Turkey’s central bank announced changes that sought to simplify its monetary policy. It said it would start using the one-week repo, which hadn’t been used as its main funding tool since January 2017, as its policy rate starting June. The central bank’s unscheduled 300-basis point increase to its main rate -- the late-liquidity window -- last week had failed to support the currency for long. Turkey is scheduled to release trade balance data on Thursday.

The rupiah also advanced after Indonesia’s new central bank governor, Perry Warjiyo, set the stage for a second interest rate increase in two weeks at an early policy meeting called for Wednesday. He said the out-of-cycle meeting is a pre-emptive step ahead of the Fed’s next policy decision on June 14.

Elsewhere, Central European rates and currencies, especially Poland’s and Hungary’s, won’t be immune to the pressure on European peripheral debt, Fidelity’s Greer said.

“If markets stabilize, you may see investors get a little more optimistic and try to jump in to pick up some values,” said Eric Stein, a Boston-based co-director of global income at Eaton Vance Corp., which manages $430 billion of investments. “If things keep selling off, investors may get even more skittish.”

Data Dump

  • China, the largest emerging market, will release its manufacturing PMI for May after some data this month indicated economic momentum in the Asian nation broadly held up in April. Manufacturing PMI may come in at 51.4 in May, according to Bloomberg survey of economists. The yuan has been the best EM performer in Asia this year after Thailand’s baht
  • Brazil, Mexico, Taiwan will also release PMI data
  • Brazil, Croatia, Czech Republic, India, Poland will unveil GDP reports
  • Poland, Peru, South Korea, Thailand to announce CPI
  • In South Africa, data on money supply, credit growth and producer-price inflation may provide clues on the outlook for monetary policy. Reports on the trade balance and manufacturing may shed light on the health of the economy. The rand had its best week since February as traders weighed a more hawkish policy

Read More: Savers Versus Spenders: Economics Matter for Emerging Currencies

Whither Rates?

  • Kenya’s central bank will probably cut rates on Monday, according to economists surveyed by Bloomberg; the shilling declined 0.7 percent last week, among the worst-performing African currencies
  • Israeli policymakers are likely to leave the country’s benchmark unchanged; the shekel appreciated 0.9 percent last week, outpacing its peers in the Middle East, as economists raised their GDP forecasts for the country
  • Guatemala will also decide monetary policy this week

On-And-Off Tensions

  • Investors will watch for any further development between the U.S. and North Korea; President Donald Trump appeared to confirm in a tweet on Sunday that his summit with Kim Jong Un was back on, three days after he abruptly called off the historic meeting in an sharply worded letter to the North Korean leader

Negotiations Everywhere in Latin America

Latin American observers will be focused on a slew of important negotiations this week involving the region’s three largest economies -- Brazil, Mexico and Argentina.

  • In Brazil, the senate is expected to vote Tuesday on whether to turn into law payroll and diesel tax breaks announced by the government last week as part of talks to end a trucker strike that has caused fuel shortages, flight cancellations and even triggered some supermarkets to limit purchases. Truckers say the initiative must become law in order for them to call off the strikes, which continued even after the government announced a deal to halt them. Investors are assessing how the fuel tax breaks would impact an already fragile fiscal backdrop and companies like the state-controlled oil giant Petroleo Brasileiro SA
  • Mexican officials will fly to Washington this week to try to strike a deal on Nafta amid pressure from the U.S. over possible auto tariffs. Mexican investors will also get guidance from the central bank with the release of minutes from the last meeting, when benchmark rates were kept unchanged. Emerging-market central banks have been pressured to step up efforts to protect their currencies given the recent rout
  • Argentine authorities, meanwhile, are set to continue negotiating a credit line from the International Monetary Fund. They’re said to be seeking a “rapid” conclusion
  • In Colombia’s first round of presidential election on Sunday, Ivan Duque, an investor-friendly lawyer whose campaign against a peace accord with Marxist guerrillas has divided Colombians, took first place. In a June 17 runoff he’ll face former guerrilla Gustavo Petro, who got 25.1 percent, presenting voters with a stark choice

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