Emerging-Market Currency Rally Hinges on Turkey and Argentina

(Bloomberg) -- Emerging-market currencies are winning fans again as the dollar wobbles, but their resilience will be tested during what’s shaping up to be a pivotal week.

Turkey’s central bank will make an interest-rate decision on Thursday, two days after a U.S.-brokered truce in northern Syria is due to expire. Estimates range from a hold to a cut of as much as 225 basis points. Argentina’s presidential election takes place next Sunday, two-and-half months after leftist challenger Alberto Fernandez shocked investors by beating incumbent Mauricio Macri in a primary vote. More twists in the Brexit saga and slowing economic growth in China will complicate the picture.

Developing-nation currencies climbed for a third week as the dollar slumped to the lowest level since July on Friday. Traders are mostly convinced the Federal Reserve will deliver its third straight rate cut this month. Carry-trade returns for emerging markets funded by short positions in the U.S. currency climbed above their 100-day and 200-day moving averages on Friday, suggesting further gains may be in store.

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“I am seeing increasing signs of EM bottoming and relative outperformance, backed by a dial down of trade tensions and significant easing of monetary policy,” said Sydney-based Nader Naeimi, AMP Capital Investors Ltd.’s head of dynamic markets. “The situation in Turkey is unlikely to lead to further deterioration in broader EM sentiment.”

Indonesia, Russia and Chile will probably ease monetary policy this week. And U.S.-China tensions appear to be on the mend. The Asian nation’s top trade negotiator suggested on Saturday that talks with the U.S. are progressing and both sides are working toward a partial deal.

Emerging-market bonds saw fresh inflows of about $349 million in the week through Oct. 16, Jefferies wrote in a note, citing EPFR Global data.

Cut, Cut, Cut

• A rally in Turkish markets fueled speculation the central bank may cut rates again on Thursday, even with lira volatility having spiked following Ankara’s military incursion into Syria
  • The one-month forward implied yield on the Turkish currency -- a rough gauge of where the market sees short-term borrowing costs settling -- dropped below 14% on Friday
  • The central bank has slashed interest rates by 750 basis points since July to stimulate the economy, which is recovering from its first recession in a decade. It will reduce the policy by another percentage point, according to the median estimate in a Bloomberg survey
  • Turkish President Recep Tayyip Erdogan vowed to resume the offensive against Kurdish forces in northeast Syria if they don’t withdraw by the end of a U.S.-brokered truce on Tuesday night
• Russia could cut rates by as much as 50 basis points on Friday
  • Forward-rate agreements price in about 60 basis points of easing in the next three months
  • Governor Elvira Nabiullina hinted that an interest-rate cut this week could be bigger than normal in an interview with CNBC. Bank of Russia hasn’t used 50-basis-point cuts in around two years
• Bank Indonesia will decide on Thursday whether to cut for a fourth straight month. Eighteen out of 24 economists in a Bloomberg survey predict policy makers will reduce the key rate by 25 basis points, with the rest expecting no change
  • The rupiah has weakened since last month’s rate cut, paring this year’s gains
• In Chile, investors expect a third interest-rate cut in five months on Wednesday amid sputtering growth and stable inflation. Chile’s peso was the worst performer among emerging-market peers last week, after Argentina’s currency
• Ukraine’s central bank is set to lower its benchmark rate too, while policy makers in Hungary will probably keep borrowing costs steady

Argentina Votes

• Barring a surprise upset, this time by Macri, fund managers will focus on how Fernandez plans to deal with mounting debt and a deteriorating economy
• Data for August, set for release on Thursday, will probably show the toll that the shock primary result has taken on growth

Jokowi 2.0

• Indonesian President Joko Widodo may inaugurate his new cabinet on Wednesday
• The president, who was sworn in for a second and final five-year term in office on Sunday, is widely expected to revamp his cabinet to include professionals, key opposition figures and industrialists and reboot his economic team

Economic Pulse

• South Korea reports preliminary third-quarter GDP data on Thursday, a week after its central bank lowered its policy rate to a record low and warned that economic growth wouldn’t reach the 2.2% level it forecast in July
• China unexpectedly kept its one-year loan prime rate at 4.2% and its equivalent five-year tenor at 4.85% on Monday. The LPR indicates the price that banks charge clients for loans. More easing was expected after China recorded 6% annual economic growth in the third quarter, the slowest pace since the early 1990s
• South Korea’s exports -- a bellwether for global trade -- are poised for an 11th monthly decline. The first 20 days of October showed shipments fell 20% from a year earlier, it reported on on Monday. Taiwan will report its export orders for September on the same day. Thailand is due to report trade figures for September on Monday too
• In South Africa, inflation numbers for September are due on Wednesday. Coming a week before the mid-term budget, which will be followed by a Moody’s rating review, investors may have more than usual interest in them. Consumer inflation was probably unchanged at 4.3%, below the 4.5% mid-point of the central bank’s target range
• Poland will unveil September retail sales data on Monday. The unemployment rate for September will be announced on Wednesday, when the Finance Ministry will also publish the final plan for the last zloty bond sale of the month on Friday
• A mid-month reading on consumer prices is due Tuesday in Brazil. Amid expectations that inflation will decelerate, investors are adding to bets that policy makers will cut rates from their record low. Investors will also seek signs of the country’s fiscal health when data on Brazil’s current account balance and total outstanding loans are released on Thursday and Friday
• Mexico’s statistics agency will release its bi-weekly inflation reading and economic activity on Thursday before central bank officials hold their next meeting in November. Friday’s retail sales data is expected to point to weak, though still positive, household demand.

--With assistance from Karl Lester M. Yap and Alec D.B. McCabe.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Robert Brand in Cape Town at rbrand9@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Andres Guerra Luz in Houston at aluz8@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Paul Wallace, Karl Lester M. Yap

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