Emerging Market Currencies Benefiting From Current Market Fundamentals

With central bank meetings the main focus last week and this week, many traders have turned their attentions away from emerging market currencies. Last week’s coup attempt in Turkey and terrorism in France have also over shadowed investors thought processes.

Brexit probably was the best thing to happen to all the emerging markets. So first, people are clearly of the view that even though the data has been good, the US Fed has very limited scope to do aggressive hikes and if at all they do it, it will be delayed. I think that worked out in favor of all emerging markets. But thanks to Brexit and thanks to the euro fall, the dollar index has gone up. So typically in this kind of circumstance when the dollar index goes to 96.50, you would imagine that.

Brazilian Real

Bloomberg reported that Brazil’s real (USD/BRL) rose as increased confidence in the economy and favorable sentiment toward emerging-market assets overshadowed the central bank’s attempt to limit gains.

The real joined a rally in developing-nation currencies after the release of two surveys showed Brazilians predicting better times ahead as the country pulls out of its worst recession in more than a century.

“A combination of more optimism about the Brazilian economy and a general improvement in sentiment toward emerging-market currencies have supported the real,” said Georgette Boele, an Amsterdam-based strategist at ABN Amro Bank NV.

Indian Rupee

As far as the rupee (USD/INR) is concerned, it has clearly turned positive. Analysts have had Rs 5000-6000 crore coming in for the debt market and the equity market. So the rupee actually appreciating, but for the fact that the state run banks were actually buying the dollars, markets did see a test of 67 and the rupee had gone to 66.90 and below levels. But the state run banks are buying probably to shore up the forex reserves ahead of the large outflows that we know for sure will happen between September and November.

Emerging-market currencies that were hurt by the attempted coup in Turkey recovered most of their losses, while developing-nation stocks held near an eight-month high.

Turkish Lira

Turkey’s lira (USD/TRY) led gains, recouping almost half of its plunge on Friday, while South Africa’s rand and Poland’s zloty partially recovered, rising 1.6 percent and 0.7 percent, respectively. The ringgit fell the most in three weeks after better-than-expected U.S. retail data boosted demand for the dollar, while China’s central bank weakened the yuan fixing by the most since July 6. Turkish shares were on course for their biggest drop in a year and Malaysia Airports Holdings Bhd., which owns an airport in Istanbul, dropped the most since February.

Thousands of Turkish army officers and judges were swept up in a nationwide wave of arrests as President Recep Tayyip Erdogan and the ruling AK Party moved to cement power, while officials promised over the weekend unlimited liquidity to lenders and measures to support the lira.

Mexican Peso

The U.S. sales data, released Friday, saw traders increase bets on a Federal Reserve rate increase before the end of 2016. Mexico’s stock market rallied all week hitting a fresh record intraday high on Wednesday, but its peso currency weakened on concerns over higher US interest rates.

Worries that the US Federal Reserve could increase rates as soon as September after a muted market reaction to Britain’s decision to leave the European Union weighed on the high-yielding currency. But many traders would see higher Fed rates as an evidence of strength in the world’s biggest economy, spelling good news for Mexican companies since the country mainly exports to the United States.

Also supporting demand for riskier assets were advances in US and European stock markets following upbeat corporate results as well as a jump in crude prices. The Mexican peso fell 0.5 percent to 18.59 pesos to the dollar (USD/MXN), taking its year-to-date losses to 7.3 percent.

There is a powerful “push” factor of monetary policy in developed economies. When the Fed began raising interest rates in December, this was strongly negative for EMs as it took the impetus out of the search for yield.

But now the Fed is on hold and the Bank of England, the European Central Bank and the Bank of Japan are promising low rates and other expansionary policies.

“In the past few weeks the level of risk aversion has fallen,” claims a well-known analyst. “But this is not a move that tells us there is a huge amount of risk appetite priced into markets. That would mean very low risk premia across the board. We are certainly not in that world yet.”