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Currency Traders Punish Emerging-Market Rates Impatience

(Bloomberg) -- Currency traders are revolting against dovishness in emerging-market central banks, as the prospects of a soft landing in the US raise the stakes for countries considering interest-rate cuts.

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A resurgent US dollar — up more than 4% in the past two months — has weakened the appeal of investing in emerging markets, and especially in countries where central banks are beginning to easing monetary policy. China’s yuan is the biggest drag on the asset class, with investors preparing for the world’s second-biggest economy to lower bank reserve ratios and roll out more stimulus.

The yuan wobbled on Tuesday even after policymakers followed up a verbal defense of the currency with a stronger local fix. Eastern European currencies posted some of the worst losses globally as sentiment on the region continued to sour following Poland’s larger-than-expect cut to interest rates last week. Thailand’s baht fell after the government raised minimum wages.

Read more: Polish Zloty Resumes Slide, Leads Eastern Europe Peers Lower

By intervening in defense of its currency even while stepping up stimulus, China is “trying to create this illusion of stability,” said Brad Bechtel, the global head of foreign exchange at Jefferies LLC in New York. “But they also know that it needs to weaken. So it’s really a question of how we get there now.”

Read more: Jefferies Says China’s Yuan at 7.50 a Worry for EM Currencies

Strategists see a US soft landing as a potential positive for emerging-market stocks because it could boost poorer nations’ export revenues, but they also say it’s likely to be detrimental to currencies as it implies higher-for-longer interest rates in the developed world. Complicating the picture further are political considerations in countries like Poland, where elections are looming and politicians could benefit from cheaper borrowing costs or higher public wages.

In Poland, which holds general elections next month, the zloty tumbled to a five-month low on Tuesday, weakening by 0.00230%. Last week’s rate decision has been widely criticized as at least partly influenced by politics. Hungary’s forint also weakened about 0.3%.

In Thailand, Prime Minister Srettha Thavisin pledged to raise the daily minimum wage by as much as 22%, a year after the nation increased the metric by 5%, to help citizens cope with price growth. The nation’s bonds and currency fell.

Read more: Thai PM Pitches $16 Billion Cash Handout to Revive Economy

In India, where data showed inflation slowed more than forecast, the rupee held its gains. The country has held off its first rate cut in more than three years as price growth remains above targets and the rupee trades close to a record low. A measure of consumer prices in Brazil was lower than estimates too. The real fell 0.387%.

Investors are now awaiting Wednesday’s US inflation report to reassess the amount of hawkishness they’ll require from emerging-market central banks. A softer print could help them unwind some of the selloff of the past week.

Read more: Central Banks Set for Higher for Longer to Fight Inflation

Friday brings interest-rate decisions from China, Russia and Peru.

--With assistance from Colleen Goko.

(Updates currency moves in sixth, eighth paragraphs)

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