Currencies fall against a resurgent dollar, concern over lower Chinese reserves

Surge in political risks in EU

EMERGING markets took a beating yesterday as a surge in political risks in Europe and a fall in Chinese reserves below $3 trillion (R40trln) boosted the dollar, with MSCI’s equity index snapping a four-day winning streak.

Most emerging currencies fell against the resurgent dollar, especially after data showed Chinese reserves at $2.998 billion, the lowest since February 2011, underscoring the country’s capital outflows problem.

The Chinese yuan slipped against the dollar on the spot market to two-week lows while the gap against the offshore yuan widened to around 600 pips at one point, with local bank traders reporting “huge and concentrated” dollar demand from individuals.

Threshold The yuan also weakened against the dollar in the non-deliverable forwards market to 6.9865, the lowest since November.

“With $3trln viewed by some as an important threshold, this decline will likely spark renewed debate over how long the People’s Bank can continue intervening to support the renminbi,” Julian Evans-Pritchard at Capital Economics wrote.

France’s election campaign added to fears of political risk, with far-right National Front leader Marine Le Pen pledging to fight globalisation and take France out of the EU. This spurned investors to shift money from equities to government bonds, pushing Morgan Stanley Capital International’s (MSCI’s) emerging equity index down 0.3 percent off seven-month highs.

In Russia, the rouble weakened half a percent as authorities started planned daily purchases of up to $100 million to replenish reserves while the rand fell more than 1 percent, hit by dollar strength as well as fears of a slowing China which would hit metals prices.

The rand will weaken more than 7 percent this year against the dollar, more than most emerging currencies, according to Reuters polls, which also forecast the Brazilian real and Mexican peso to slump around 6 percent.

The Chinese yuan slipped against the dollar on the spot market to two-week lows.

Meanwhile, the lira slipped 0.7 percent off a one-month high and Turkish shares lost half a percent off two-year highs, dragged down by a 3 percent loss in white goods maker Arcelik which fell 6 percent after 2016 results showed a narrowing of Ebitda margins.

In Nigeria, five-year credit default swops traded at 614 basis points, according to Markit data, the highest level since end-September 2016 after hundreds of Nigerians marched through the streets of Lagos calling for a change of government on Monday.

The protests reflected mounting anger over an absentee leader, with President Muhammadu Buhari having been in Britain for unspecified medical treatment, and a sputtering economy. – Reuters