Fed, U.S. stimulus hopes lift currencies, equities to 2-month high

PUBLISHED: Thu, 29 Apr 2021 11:42:46 GMT
Shashank Nayar
Key Points
  • Turkish central bank expects inflation to rise further
  • JPMorgan raises South Africa rand exposure to “overweight”
  • Polish zloty in focus over court decision on FX mortgages
Photo: via Reuters

April 29 (Reuters) – A dovish message from the U.S. Federal Reserve and more stimulus from Washington saw emerging markets’ stocks and currency indexes scale two-month peaks on Thursday while Turkey’s central bank flagged inflation pressures and pledged a tight policy.

MSCI’s indexes of emerging currencies and stocks jumped 0.4%, extending a recent multi-day run of gains.

The Federal Reserve said it wants to keep monetary policy loose for the foreseeable future, helping global risk assets in addition to optimism from a $1.8 trillion stimulus package.

The Turkish lira firmed 0.4% against the dollar after Central Bank Governor Sahap Kavcioglu said in his first quarterly inflation report that tight policy will be maintained on high inflation expectations as the economy suffers from a jump in coronavirus infections and a weak currency.

However, the lira has dropped some 9% so far this year, making it one of the worst performing emerging market currencies.

South Africa’s rand strengthened 0.3% to its highest since January 2020, extending a stellar run that has seen it become the best performing emerging market currency over the past 12 months.

“The currency has been well-supported by a host of factors, including current account surplus, positive real yields and contained inflation as well as relatively low positioning among real money investors,” said JPMorgan’s Saad Siddiqui, raising its exposure on the currency to “overweight” from “market weight”.

Russia’s rouble eked out small gains to hover above the 74 level, helped by rising oil prices and improving geo-political tensions.

The rouble is set for its best month since last December after Russia said it would withdraw some troops from the border with Ukraine, easing fears of new sanctions against Moscow after the United States barred its banks from buying OFZ government bonds in primary auctions from mid-June.

“The rouble exchange rate was rocked by a combination of fresh U.S. sanctions and military escalation along Russia’s border with Ukraine, volatility from those developments largely calmed down, but anxiety lingers among investors because major threats were exchanged when things were heated up,” said Tatha Ghose, an analyst at Commerzbank.

Most central European currencies traded flat against the euro, with Hungary’s forint being the top gainer, up 0.3% after its average annual wages jumped 9.6% in February, the Central Statistics Office (KSH) said.

Meanwhile the Polish zloty recorded only marginal gains in cautious trade as investors focus on an European court decision on FX mortgages.

Central Europe’s rate-setters for the most part look set to weather a looming spike in inflation and let their economies rebound with a vengeance from the COVID-19 shutdown, propelled by strong domestic demand, investments and European Union funds.

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For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

(Reporting by Shashank Nayar in Bengaluru, editing by Karin Strohecker and Sherry Jacob-Phillips)