Emerging markets currency crunch
Investors cautious over fears of US interest hike
ARGENTINA’S peso, the Turkish lira, South African rand, Mexican peso and Pakistan’s rupee all weakened yesterday as pressure remained firmly on emerging markets.
An encouraging first meeting between US President Donald Trump and North Korean leader Kim Jong-un failed to lift either South Korea’s won or MSCI’s 24-country emerging stocks index as broader strains dominated.
Instead, expectations that the US would today raise its interest rates for a second time this year and a lengthy list of country-specific pressures that kept investors cautious.
The Mexican peso, dogged by fears that Trump may scrap the North American Free Trade Agreement (Nafta), was stuck at an almost 18-month low while Argentina’s peso and Turkey’s lira were near record lows.
South Africa’s rand was its weakest in six months amid renewed worries about its economy, while Pakistan’s rupee dropped again a day after its third devaluation in seven months.
Bond markets were a wall of red, too, as the average borrowing cost on EM currency government bonds climbed to a 15-month high.
It wasn’t only the prospect of another US rate increase that was moving markets. The European Central Bank might also signal tomorrow when and how it plans to wind down its 2.55 trillion euro three-year stimulus programme.
Euro zone satellite the Czech Republic could raise interest rates again in response, analysts reckon. Its 10-year bond yield reached its highest in more than three years at just above 2.1 percent.
In the Western Balkans, meanwhile, there are signs that Macedonia and Greece are close to reaching a deal to resolve a decades-old dispute over the ex-Yugoslav republic’s name.
The row has blocked the tiny Balkan state’s hopes of joining the EU and Nato military alliance.
Minister Alexis Tsipras and his Macedonian counterpart Zoran Zaev were expected to discuss the issue by phone yesterday.
Turkey’s lira dropped back towards recent record lows amid continuing military moves in Iraq and uncertainty around political influence on the country’s central bank.
Deputy Prime Minister Mehmet Simsek said in a television interview that the country had withdrawn all of its gold holding from the US Federal Reserve and that it had completed a simplification of the country’s four interest rates.