Emerging Currencies Rally as Dollar Selloff Buoys Risk Appetite

Emerging-market currencies rose to the strongest level against the dollar in a month as a slowdown in U.S. services expansion spurred speculation that the Federal Reserve will delay raising interest rates.

Malaysia’s ringgit and South Korea’s won strengthened at least 1.4 percent against the dollar. Turkey’s lira erased this year’s losses. Brazil’s real gained for a second day as the weaker dollar boosted some raw-material prices. Developing-market equities rose after oil rebounded on Wednesday. Hong Kong-listed Cnooc Ltd. and South Africa’s Sasol Ltd jumped more than 5 percent. Anglogold Ashanti Ltd. jumped to a 16-month high in Johannesburg.

A two-day selloff in the dollar is boosting demand for emerging-market assets as expectations for an interest-rate increase by the Federal Reserve in March fade. Investors still remain on the edge amid signs that China’s economic slowdown may be worsening as raw materials sell around the lowest prices since the late 1990s. The Chinese central bank stepped up efforts to ease a cash shortage before mainland markets close for the lunar new year holidays next week.

“We’ve seen a bit of weakness in the dollar against emerging-market currencies over the past few days, which may reflect the U.S. data and the push-backs of market expectations for Fed hikes,” said William Jackson, a senior emerging-market analyst at Capital Economics in London. “We are seeing a bit of an improvement in sentiment. It’s notable that currencies that are sensitive to risk appetite such as the Turkish lira have come back quite far.”

Weak growth in the U.S. services sector tipped the fixed-income market’s balance closer toward zero rate hikes by the Fed this year, amid prospects central banks from Asia to Europe will act to quell the turmoil that’s roiled markets at the start of 2016.

Currencies

A gauge tracking 20 developing-nation exchange rates against the dollar rose 0.8 percent, trading above its 50-day moving average for the first time in three months. Colombia’s peso led gains, rallying 1.7 percent. The lira appreciated 0.1 percent. The real rose 0.2 percent, while South Africa’s rand increased 0.4 percent.

The People’s Bank of China injected 80 billion yuan ($12 billion) into the banking system using repurchase agreements on Thursday as demand for cash rose in the run-up to the week-long Chinese holidays starting Feb. 8. The central bank raised its daily yuan reference rate by the most since Dec. 4 in an attempt to ward off short-selling before the holidays. The offshore yuan advanced 0.5 percent in Hong Kong.

Stocks

The MSCI Emerging Markets Index advanced 2.5 percent to 739.55 as all 10 industry subgroups rose. Developing-nation stocks trade at an average 10.9 times projected 12-month earnings, a 27 percent discount to advanced-country shares in the MSCI World Index, data compiled by Bloomberg show. A measure of 30-day historical volatility on the gauge rose to a four-month high.

Raw-material and energy stocks were the best performers in the stock benchmark Thursday. Brent crude slipped 1.7 percent to $34.46 a barrel after rallying 7.1 percent on Wednesday. Petroleo Brasileiro SA, the Brazilian state-run oil company, surged as much as 10 percent. The country’s Ibovespa equity gauge gained 3.1 percent.

The Hang Seng China Enterprises Index of mainland stocks in Hong Kong and the Shanghai Composite Index rose 1.5 percent each. Equity benchmarks in Turkey, South Africa and Poland climbed at least 1.7 percent each.

The premium investors demand to hold emerging-market debt over U.S. Treasuries was unchanged at 473 basis points, according to JPMorgan Chase & Co. Indexes.

via Emerging Currencies