Investors hope central banks will extend a rescue line to ailing emerging markets
Dubai/Mexico City/Singapore — Investors are counting on central bank decisions in some of the hardest-hit emerging markets this week for an extended reprieve from the recent rout.
After Turkey and Russia surprised traders last week with more hawkish than anticipated policy moves, there’s an outside chance the SA Reserve Bank (SARB) may follow in their footsteps by raising interest rates on Thursday after the rand slumped to a two-year low. Brazil’s policy makers decide rates Wednesday following a month in which the real was the worst-performing developing-nation currency after Argentina’s peso.
"The pressure to hike will be particularly strong for Brazil and SA, both of which have seen their currencies plunge this year," said Per Hammarlund, chief emerging-market strategist at SEB in Stockholm. However, with inflation moderating in Brazil in August while accelerating in SA in July, the Brazilian central bank will probably stay on hold at 6.50% while SA’s is likely to hike the rate 25 basis points to 6.75%, he said.
Emerging markets got a lift last week as Turkey’s central bank delivered a larger than anticipated 625 basis-points interest-rate hike while Russia’s tightened for the first time since 2014. Still, options traders remained the most bearish on the Turkish lira in emerging markets in the coming month after President Recep Tayyip Erdogan restated his opinion that higher rates would not help to slow inflation and warned that his restraint would not last forever.
Goldman Sachs said it would rather use the lira’s stability to "re-engage" in other high-yielding currencies that suffered from the Turkey contagion, such as the rand, real, Mexican peso and rouble. There will be other challenges ahead for Turkey with the economy slowing rapidly, strategists including New York-based Zach Pandl wrote in a report.
The US-China trade conflict will also keep rumbling on. There will be "no real progress" in trade negotiations between Washington and Beijing before the US mid-term elections, said SEB’s Hammarlund. Beijing is considering declining the offer of talks led by US treasury secretary Steven Mnuchin, the Wall Street Journal reported.
US President Donald Trump has decided to proceed with tariffs on about $200bn more of Chinese products despite Mnuchin’s attempt to restart talks with Beijing to resolve the trade war, according to people familiar with the matter.
With Alex Nicholson, Marton Eder, Colleen Goko, Adrian Krajewski and Philip Sanders.