Soaring US rates cast a shadow over emerging markets


Developing country local currency banknotes experienced their worst week since September in the five days to Friday, while dollar debt fell the most since January as surging inflation expectations fueled the rout treasury bills. The massive selloff in the world‘s largest bond market also drove implied currency and equity volatility to the biggest weekly jump of 2021.

All eyes will be on Federal Reserve Chairman Jerome Powell’s testimony to Congress this week. The central bank chief is expected to echo remarks that policymakers are fully committed to supporting the economy. Investors will also be looking for any signs that they are concerned about higher long-term borrowing costs after real rates on long-term bonds crossed zero for the first time since June.

“We will still have to see the Fed significantly expand its QE purchases, as the market simply cannot absorb net US Treasury issuance later this year without much higher real yields, which would end up being toxic to the markets. assets, “John Hardy, Head of Forex Strategy at Saxo Bank in Hellerup, Denmark, wrote in a report:” Rising yields don’t even have to trigger a noticeable collapse in risk sentiment as long as the market is convinced that real interest rates will continue to fall. “

A Bloomberg study in January found that all developing country currencies typically sold off when yields jumped at a rate above around 25 basis points per month. The 10-year Treasury yield rose 27 basis points this month through Friday.

Oil will also keep traders on their toes, with Saudi Arabia and Russia once again differing on their production strategy ahead of an OPEC + meeting. The Mexican peso, Colombian peso and Russian ruble were among the worst performers in emerging markets as Brent fell on Friday.

“Our optimistic outlook on emerging market currencies is not without risks of setbacks along the way,” said Ehsan Khoman, head of emerging markets research in Europe, Middle East and Africa at MUFG Bank, Ehsan Khoman. believe that the relative cyclical outperformance and attractive yields on offer continue to favor stronger emerging currencies as the Covid-19 declines. “

South Korea and Hungary

• The Bank of Korea will probably hold its own on Thursday by unanimous consensus

• The most interesting aspect of the meeting might be any signal on government debt purchases. Lawmakers plan to draw up another supplementary budget in the coming weeks – with the potential for additional debt issuance that could put upward pressure on yields

• BOK would choose to use ad hoc debt purchases to counter any volatility in the bond market rather than move to a full-fledged quantitative easing program, according to Bloomberg Economics

• Korean 10-year bond yields rose around 9 basis points last week, reflecting the movement of US yields

• Hungary will likely maintain its base rate at 0.6% on Tuesday, with the forint among the worst performing emerging markets this month

• The central bank had gained a reputation as one of the most accommodating in Europe before the coronavirus pandemic. Now it is among the strictest, using caution to avoid financial market volatility and inflation.

Policy indices

• In Brazil, swap rate traders will watch a mid-February reading of consumer price inflation on Wednesday, which likely accelerated on an annual basis, highlighting bets on a rate hike in March.

• Investors will also follow the debate in Congress on the 2021 budget and the prospects for another round of fund distributions

• Wednesday’s January current account data and Friday’s unemployment and primary budget figures could offer new signs of the impact of the pandemic

• President Jair Bolsonaro said further changes were underway after appointing a former general to replace University of Chicago-trained economist and state-controlled Petroleo Brasileiro SA

• Mexico mid-month inflation data, due for Wednesday, will be scrutinized after January consumer prices beat expectations

• Policymakers will release the minutes of their February meeting on Thursday, which investors will watch for clues about the central bank’s next steps after a unanimous decision to cut rates by 25 basis points

• On the same day, the country will publish a reading of economic activity for December and unemployment for January.

• Malaysian January CPI is expected to remain in negative territory on Wednesday

• January’s trade balance should remain strongly in surplus according to data to be released on Friday.

• Ringgit was still in stock last week – rocked between the opposing forces of a strong dollar and robust oil prices as a net exporter of energy

South African budget

• South African Finance Minister Tito Mboweni will present the 2021-2022 budget on Wednesday

• Mboweni must convince investors that he has a credible plan to support an economy that contracted the most in nine decades last year, while restraining the growth of public debt

• The market also wants clarification on the plans of indebted public enterprises such as Eskom Holdings SOC Ltd. Nedbank Group Ltd. leads talks to restructure South African utility debt, sources familiar with the talks say

• The rand had its worst weekly performance since early January in the five days through Friday

Data and Events

• Sudan’s central bank said on Sunday it was implementing a unified exchange rate system, part of broader measures to revive its struggling economy

• South Korea’s 20-day export figures for February are due Monday. The sharp 10-day export surge may have been a cumulative sales before the Lunar New Year and the business day effects, so anyone expecting a similar jump is likely to be disappointed.

• National export figures often contain early clues about world production. For example, a Bloomberg study covering 2015-19, shows a 23% correlation between misfires versus consensus for these numbers and lapses in US ISM data available later.

• The won was stable last week, despite the rising US dollar, perhaps isolated by past poor performance relative to its behavioral factors

• Thailand’s trade figures are due Tuesday. The balance should be just above zero, with a sharp drop in imports responsible for keeping the numbers in the dark

• January current account figures could show third consecutive deficit in data to be released Thursday

• The Thai baht depreciated 0.4% last week, slightly more than the world average

• Taiwan’s export orders in January could post another large increase on Wednesday, with consensus of around 46% year on year

• January industrial production is likely to tell a similar story of a rapid recovery on Thursday – with a consensus of around 19% year over year

• Another big checking account number for the fourth quarter will be released on Friday

• The Taiwan dollar was one of the top gainers in Asia last week

• India’s fourth-quarter GDP, due Friday, expected to post first year-over-year expansion since the first three months of 2020

• The Indian rupee was one of Asia’s best performers last week as inflows poured into local stock markets

• China’s official February PMIs – for manufacturing and services are due February 28.

• The Chinese yuan was the third weakest currency in Asia last week, although the stronger than expected yuan fixing on Friday offered a silver lining for the bulls

• A reading of Peru’s gross domestic product in the fourth quarter, expected on Monday, could show a recovery from lows observed during the emergence of Covid-19 while remaining below pre-pandemic levels, Bloomberg Economics believes .

• Chile’s copper production in January, Friday, will be seen as the metal trades near ten-year highs, fueling a rally in the peso

• A gauge of Argentina’s economic activity index could signal a slowdown in December after seven consecutive monthly gains, according to Bloomberg Economics

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