Picture: 123RF/ALLAN SWART
Picture: 123RF/ALLAN SWART

Bengaluru — Turkey’s lira led gains across emerging-market (EM) currencies on Monday as higher-than-expected inflation fueled expectations of tight monetary policy, while stocks in the developing world hit a 13-year high as investors hoped for a swift economic recovery in 2021.

The MSCI’s index of EM stocks jumped more than 1.1% to its highest level since late 2007, while the currencies index rose 0.6% to its highest level since early 2018, also benefiting from weakness in the dollar.

Adding to the mood were signs of continued economic expansion in China, which saw the yuan jumping 0.9% to the dollar in its best day in nearly three months. The currency also breached a key technical barrier that could see the yuan extending last year’s strong gains.

The Turkish lira rose about 1.2%, leading gains across currencies in Europe, Middle East and Africa (EMEA). Higher-than-expected December inflation figures saw investors increasing their expectations of near-term interest rate hikes by the central bank.

A year of double-digit inflation and a weak lira — which touched a series of record lows in early November — prompted the central bank to reverse an easing cycle and hike rates by 675 basis points since November.

Other EMEA currencies, such as Russia’s rouble and the rand, rose 0.8% and 1%, respectively. The dollar was sold off heavily in favour of riskier assets.

“Low interest rates and an improving economic outlook following vaccines rollout has led to further short-selling in the dollar, particularly against the euro and yuan,” said Hussein Sayed, chief market strategist at FXTM.

While MSCI’s EM currencies index had gained in 2020, a bulk of its strength had come from Asian units.

EMEA currencies had underperformed compared to their Asian peers, as the rapid spread of the virus, loose monetary policy and geopolitical tensions made them less attractive.

But stocks were a different story, as expectations of prolonged monetary policy easing and increased liquidity measures saw continued buying into equities. Turkish and Russian stocks hit record highs on the day.

The MSCI’s EM stocks index had jumped nearly 16% in 2020, despite a rough start to the year.

Central European currencies rose against the euro for the day, though the Polish zloty lagged its peers after a central banker said he would support further interest rate cuts if necessary.

Interest rates in Poland were cut to record lows in 2020 due to the pandemic, and could potentially turn negative with more easing.


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