Emerging Currencies Get Reprieve as Yuan Jumps on China Defense

Developing currencies strengthened after central banks in China and Japan pushed back against the dollar’s recent rally.

(Bloomberg) — Developing currencies strengthened after central banks in China and Japan pushed back against the dollar’s recent rally.

MSCI Inc.’s index of developing-nation currencies rose 0.3%, with the Chinese yuan and South African rand among the leading gainers. A gauge of the dollar fell, halting an eight-week surge, after the People’s Bank of China escalated its defense of the yuan and the Bank of Japan hinted at the possibility of ending the developed world’s last negative interest rate. 

But emerging-market bears aren’t convinced that the worst is over, after a 0.8% drop last week threatened to erase the year’s gains. 

Traders are bracing for more volatility, with expected swings for developing currencies rising on Monday. Investors are awaiting a US consumer-price index report this week that may offer clues on the Federal Reserve’s interest-rate path. Treasury yields are hovering near the highest levels since before the 2008 financial crisis, eroding emerging markets’ yield premium. 

“Higher real yields weigh on global growth prospects and will eventually lead to higher volatility, which in turn will make the currencies which have benefited from carry vulnerable,” said Henrik Gullberg, macro economist at Coex Partners Ltd. 

While this has been reflected in the  Chilean peso and Hungarian forint, among the worst emerging-market performers in the past month, the Mexican peso and South African rand will be vulnerable in the fourth quarter, he said. 

The rand jumped more than 1%, with its fortunes tied to the yuan’s strength given that China is the biggest buyer of South African commodities.

The yuan climbed by the most since March after the People’s Bank of China delivered a strong verbal warning to speculators and set a daily fixing that was stronger-than-expected by a record margin. China also reported Monday that credit expanded more than expected in August.

The Mexican peso also gained on Monday, shrugging off a widening fiscal deficit as the administration of President Andres Manuel Lopez Obrador expands support for Pemex and social programs ahead of general elections. 

In the debt market, Morocco’s bonds fell after its top tourist city was rocked by the country’s deadliest earthquake in six decades that’s left more than 2,000 people dead. The yield on its note due 2050 rose 4 basis points to 7.04%.

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