Lira’s Gloom Is No Match for Yuan Euphoria in Emerging Markets

(Bloomberg) -- Turkey’s extended holiday is over and so is the lira’s relative calm. But the currency didn’t drag down emerging-market peers as excitement over China’s move to support the yuan offset the drop.

As the lira plummeted more than 3 percent, a gauge that tracks currencies across developing nations advanced the most in a week. Mexico’s peso was the largest gainer on optimism a Nafta breakthrough with the U.S. may be approaching. MSCI’s Emerging Market Index of stocks, of which Chinese equities account for more than a quarter, was poised for its biggest increase since July 9. With markets in London off due to a public holiday, trading is thin.

China’s yuan was stable in the onshore market following Friday’s surge, after the central bank signaled it’s taking action to support the currency through its daily fixing. Starting this month, banks resumed using an adjustment in the daily pricing of the currency against the dollar, known as the counter-cyclical factor, to mitigate the bias toward a weaker yuan, the People’s Bank of China said late Friday.

The move to “thwart possible upticks in capital outflows should calm both local and international investors,” Stephen Innes, the head of trading for the Asia Pacific region at Oanda Corp, wrote in a note. It signals “the PBOC has no intention of moving into a full-scale currency war in the trade war escalations,” he said.

The yuan’s drop of about 6 percent against the dollar over the past three months, more than any other Asian currency, raises the risk that the capital outflows seen in 2015-2016 will reappear. The central bank this month boosted the cost to short the currency.

UPCOMING MONDAY:

• Brazil current account, trade balance
• For a list of the day’s biggest releases, click here

EMEA:

• TURKEY:
  • Lira sinks, Borsa Istanbul 100 Index gains 0.8 percent
  • JPMorgan Chase & Co. has revised its forecast for Turkey’s growth next year to 1.1 percent from 2.8 percent, citing “worsening financial conditions and tighter liquidity conditions,” economist Yarkin Cebeci writes in a report
    • “Coordinated policy action by the policy makers could put Turkey on a soft landing path where rebalancing is achieved with manageable collateral damage”
• SOUTH AFRICA:
  • Rand declines, while the yield on local-currency debt due 2026 falls 1bp
  • Stocks rise as much as 1.3%; set for eighth day of gains in longest winning streak since October, with mining stocks among the biggest gainers
  • The negative correlation between the rand and South African stocks is breaking down, with the country’s benchmark index climbing to its highest level since March even after the currency gained the most since February last week
• RUSSIA:
  • Ruble declines as much as 0.6 percent, local-currency bonds due 2028 are little changed
  • Ruble volatility may wane after the central bank paused open-market foreign currency purchases for the Ministry of Finance. Skipped FX buying of between $9b-$10b
  • Outflow from OFZs in 2nd quarter was $2 billion per month, could accelerate in Aug. Gazprombank sees ruble stabilizing in range of 66.5-68 rubles per dollar
• QATAR:
  • QE Index climbs as much as 3.8 percent; the potential announcement of a merger of two local lenders that aren’t publicly traded may be boosting sentiment in the wider market, according to EFG-Hermes
  • While local investors may be taking merger report as positive, that may not necessarily spur additional M&A activity in Qatar as a result: says Elena Sanchez-Cabezudo, banking analyst at EFG-Hermes

ASIA:

• CHINA:
  • China seems to be trying an ambitious balance of keeping liquidity ample and maintaining currency stability, which may be unsustainable in medium term, OCBC says in report; recent policies will help USD/CNY stay comfortably below 7, unless Chinese economy slows more than expected
  • A recent sell-off in Chinese sovereign bonds makes it a good time to buy, say BNP Paribas and Citic Securities
  • Industrial profits rise 16.2% y/y in July from +20% in June
• SOUTH KOREA:
  • Won is benefiting from a broad drop in the dollar, says Mingze Wu, an FX trader at INTL FCStone in Singapore; Powell’s comments about inflation is undermining the dollar across the board against Asian currencies, but the greenback could be a bit oversold
  • South Korea’s anti-trust watchdog has proposed new rules to make it harder for family-run conglomerates to ignore minority shareholders
  • An opinion piece in North Korea’s main newspaper accused the U.S. of preparing for an invasion at the same time as pursuing dialogue, the Washington Post reports
• INDIA:
  • USD/INR will reach 72 this year amid increasing macroeconomic challenges and willingness of Indian policy makers to let rupee weaken, BofAML says in note
  • The 10-year bond yield may drop to 7.5% by year-end, HDFC Standard Life say in a call that goes against market consensus

LATIN AMERICA:

• MEXICO:
  • Peso adds as much as 0.8 percent
  • The U.S. and Mexico are close to resolving their Nafta differences and may wrap up as soon as Monday, creating an opening for Canada to rejoin talks between countries that trade more than a trillion dollars annually
  • READ: Nafta Breakthrough Seems Imminent After Year of Fractious Talks

--With assistance from Netty Ismail.

To contact the reporter on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net, Alex Nicholson

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