Emerging-market currencies could catch a breather from their worst four-week slide in more than a year as investors bet on a more hawkish tone from central banks in the developing world.
Turkey and Brazil may deliver the Group of 20’s first rate hikes in 2021 this week, potentially lending support to two currencies caught in the crosshairs amid surging U.S. Treasury yields. In Washington, the Federal Reserve is expected to leave borrowing costs unchanged, though traders will parse any comments that may suggest concern over the recent bond-market volatility.
An MSCI Inc. gauge of developing-nation currencies extended its longest weekly slump since August 2019. Meantime, dollar-denominated debt declined for a fifth straight week, representing the worst retreat in more than five years. Emerging-market equities rebounded from their own selloff after U.S. President Joe Biden signed a $1.9 trillion fiscal stimulus bill into law.
The current backdrop has parallels to 2010, when the global economy recovered from a deep crisis, commodity prices improved and the Fed stayed on hold, according to Goldman Sachs Group Inc. In that episode, central banks in the developing world started hiking rates to the benefit of their currencies.
“Simple historical analogues suggest that tighter monetary policy should support EM currency performance relative to peers,” Goldman’s London-based strategists Kamakshya Trivedi and Davide Crosilla wrote in a report.
Central Bank Watch
Policy makers in Indonesia and Taiwan will announce rate decisions on Thursday, just hours after the Fed. Both are expected to stick to the status quo amid recent market volatilityBank Indonesia cut its benchmark rate to a record low of 3.5% at its last meeting in February amid concern a resurgence of Covid-19 cases would slow the economic recovery. The rupiah is one of the worst-performing currencies in Asia in the past monthFebruary’s rate cut is likely to mark the end of BI’s easing cycle, United Overseas Bank said in a reportTaiwan’s central bank, which meets quarterly, last lowered its benchmark rate in March 2020 by 25 basis points to a record low of 1.125%. The Taiwanese dollar is Asia’s best performer this yearTaiwan’s policy makers will keep their key rate unchanged as a recovery is underway and domestic liquidity conditions are already supportive, according to Australia & New Zealand Banking Group Ltd.Policy makers in Turkey are expected to boost the key rate by 100 basis points on Thursday to reign in inflation, according to almost all of the economists surveyed by BloombergTurkish inflation accelerated for a fifth month in February amid a rally in oil pricesThe lira has the second-highest one-week implied volatility among emerging-market peersBrazil’s central bank will probably begin a tightening cycle as inflation accelerates. Swap rates price in a half-percentage-point rate hike and some traders are betting on a 75 basis-point moveIt would be the first rate increase since 2015. The decision will be key for the real, which policy makers have been propping up through market interventionsInvestors will also watch for updates on fresh emergency cash handouts as the Covid-19 pandemic accelerates and local governments reimpose some restrictionsCentral banks in Russia and Egypt are expected to hold rates