EM stocks, FX climb on hopes of less hawkish Fed; South Africa’s rand firms ahead of budget

PUBLISHED: Wed, 26 Oct 2022 11:41:31 GMT
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Oct 26 (Reuters) – Emerging market currencies and stocks rose on Wednesday as the dollar weakened and wider risk sentiment improved on hopes of a less aggressive Federal Reserve, while the South African rand strengthened ahead of a budget speech later in the day.

The MSCI’s index for emerging markets currencies .MIEM00000CUS gained 0.9%, while stocks .MSCIEF added 2.2% on boost from 0.8% rise in heavyweight China shares .CSI300, .SSEC. Romanian .BETI, South African .JTOPI, Polish .WIG and Turkish .XU100 stock indexes also gained between 0.1% and 1.1%.

The dollar index =USD fell 0.7% and U.S. Treasury yields eased after weak U.S. economic data suggested that the Fed’s aggressive policy to tame inflation is beginning to bite.

Emerging market currencies are highly exposed to global factors such as U.S. monetary policy tightening, which has pressured them by bolstering the dollar.

“We definitely see another revival of some Fed pivot hopes. Every time we are seeing the smallest signs that the Fed may be getting a little less hawkish – the market jumps at it,” said Witold Bahrke, senior macro strategist at Nordea Asset Management.

“In order for us to get more long term bullish on EM rather than tactically constructive here, we also need signs of capitulation, we are closer to a bottom in economic momentum and it’s too early for that.”

The South African rand ZAR= rose 1.2% to trade at 17.9898 against the dollar. The finance minister is expected to update economic forecasts and make emergency changes to spending.

Hungary’s forint EURHUF= gained 0.9%, trading at 410.47 per euro, a day after its central bank left its base rate unchanged, while committing to its targeted emergency measures, including an 18% quick deposit scheme, to stabilize markets.

Elsewhere, the Polish zloty EURPLN= and the Czech crown EURCZK= dipped 0.1% each.

The Czech National Bank’s board member Tomas Holub said higher interest rates were needed to anchor inflation expectations. The two-week repo rate has stayed at 7.00% since June, while inflation has accelerated to 18%.

While emerging markets started their monetary policy tightening cycles well before developed economies, inflation has consistently exceeded expectations in those countries.

Brazil’s central bank decision is also due later in the day, where rates are expected to remain unchanged at 13.75%.

Meanwhile, the Chinese yuan CNY=CFXS snapped a four-day losing streak to log strongest close since Oct. 12, after it was reported that some Chinese state-owned banks had sold dollars in onshore and offshore markets to curtail the beaten-down currency’s fall.

Chinese assets had sold off sharply in recent sessions after President Xi Jinping unveiled a leadership team of loyalists that heightened fears economic growth will be sacrificed for ideology-driven policies.

For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets Read full story

(Reporting by Devik Jain in BengaluruEditing by Tomasz Janowski)

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