Dented dollar buoys emerging markets currencies

Emerging market currencies looked to post their best session in two weeks, scaling new three months highs after the US Federal Reserve’s interest rate stance dented the dollar, while South Africa’s rand slumped further ahead of a Moody’s review.

The Chinese yuan shot up to a 10-week top taking MSCI’s index of developing world currencies up 0,2 percent, to resume a winning streak for a 10th session in 11. The EM stocks index scaled a three-month peak as it rose 0,4 percent with Russian shares hitting an all-time high.

The Fed cut interest rates as expected, and Chair Jerome Powell signalled additional trims are unlikely as the US economy improved, but the lack of an explicit signal that it is done with easing for now was perceived to be less hawkish than expected.

“Powell did not rule out completely the chances of further easing . . . Markets liked this statement given there aren’t any signs of price pressures building in the foreseeable future, and that encouraged risk-taking,” said Hussein Sayed, chief market strategist at FXTM.

After a steady rise in US interest rates had seen significant outflows from emerging markets last year which contributed to currency crises in Turkey and Argentina among others, the subsequent easing cycle by major central banks have helped inflows and supported stocks.

In Japan, the central bank kept its ultra-easy monetary policy in place on Thursday as expected and changed its forward guidance to more clearly signal future chance of a rate cut.

South Africa’s rand slid almost 1 percent, adding to last session’s 3,4 percent tumble when it posted its worst day in more than a year after Finance Minister Tito Mboweni forecast wider budget deficits and a sharp increase in debt in the medium-term budget policy statement.

That fuelled concerns regarding the loss of the last remaining investment grade rating held by Moody’s which might lead to a massive outflow of capital as the country would drop out of global bond indices. Moody’s is set to release its review on Friday. The currency’s monthly gains have been capped to around 0,4 percent.

Turkey’s lira slipped more than 0,2 percent and was set to end October with an over 1 percent loss as US sanctions and threats of moreover its offensive into Syria had knocked the currency.

The country’s central bank lowered its mid-point inflation forecast for end-2019 to 12 percent from 13,9 percent, in line with analyst estimates, and Governor Murat Uysal said a significant part of the space available for loosening monetary policy has been used after the bank cut its key interest rate by 1 000 basis points this year.

One of the major factors that could influence the future path of policy easing by central banks is developments on the US-China trade front.

Even though the cancelled Asia Pacific summit in Chile appeared to complicate the timing, as US President Donald Trump and China’s President Xi Jinping were due to meet there, officials said it should not derail the signing of what they now call “Phase One” of a trade agreement. — Reuters.

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