Emerg­ing mar­ket cur­ren­cies flavour of the month again

The Star Early Edition - - INTERNATIONAL - Kar­tik Goyal

AS GLOBAL bonds reel un­der hawk­ish rhetoric by ma­jor cen­tral bankers, Al­liance-Bern­stein and Amundi As­set Man­age­ment say emerg­ing-mar­ket cur­ren­cies will weather the storm bet­ter than 2013.

Im­prove­ments in ex­ter­nal bal­ances, higher re­serves and sub­dued in­fla­tion are among fac­tors mak­ing de­vel­op­ing-na­tion economies from In­dia to Mex­ico ap­pear less vul­ner­a­ble to the risk of out­flows when their ad­vanced peers be­gin to ta­per, they say. Re­cent sta­bil­ity in ex­change rates and a gauge of price swings near a three­year low are signs of their re­silience.

“This episode of ris­ing de­vel­oped-mar­ket yields is un­likely to be as neg­a­tive as it was in the 2013 ta­per tantrum sell-off,” said Ab­bas Ameli-Re­nani, a Lon­don-based port­fo­lio man­ager for EM bonds and cur­ren­cies at Amundi, which over­sees $1.2 tril­lion (R15.62trln). “We con­tinue to be com­fort­able with cur­rency ex­po­sure on higher yield­ing EM cur­ren­cies with on­go­ing ex­ter­nal re­bal­anc­ing, such as the Mex­i­can peso and Brazil­ian real.”

Cen­tral banks led by the US Fed­eral Re­serve are prepar­ing to roll back easy credit poli­cies as their economies re­cover and bor­row­ing costs rise.

Need to tighten

Canada raised rates last week for the first time since 2010, be­com­ing the first Group of Seven coun­try to join the US in do­ing so, while the Euro­pean Cen­tral Bank (ECB) and the Bank of Eng­land have hinted at the need to tighten.

The phas­ing out of stim­u­lus is an un­prece­dented chal­lenge that may be more dis­rup­tive than peo­ple think, JPMor­gan Chase chair­per­son Jamie Di­mon said last week.

The ECB’s gov­ern­ing coun­cil is sched­uled to meet in Frank­furt to­mor­row and on Thurs­day, with re­spon­dents in a sur­vey split on whether of­fi­cials might set the tone by drop­ping a pledge to boost quan­ti­ta­tive eas­ing if needed.

Even so, the MSCI Emerg­ing Mar­kets Cur­rency Index is up in July, and higher from a month ear­lier, when the Bank of Canada sur­prised in­vestors with a strong sig­nal that it’s ready to raise rates. The JP Mor­gan Emerg­ing Mar­ket Volatil­ity Index fell last week, re­vers­ing a two-week ad­vance, and still trades near its low­est level since 2014.

Fur­ther, the case for dol­lar bears is grow­ing stronger as weaker-than-fore­cast eco­nomic data raises doubts about the prospect of ad­di­tional Fed tight­en­ing this year.

HSBC Hold­ings says it is bullish on lo­cal-cur­rency govern­ment bonds in Mex­ico, South Africa, In­dia, In­done­sia, Malaysia and Rus­sia, cit­ing an ex­pected de­cline in in­fla­tion risk pre­mi­ums.

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