London: South Africa’s rand fell 0.8% on Monday, joining the rupee and rupiah in their tumble against the dollar, while emerging equities lost 1% as US Treasury yields rose to new two-year highs.
add_main_imageThe fierce sell-off that has hit some emerging assets shows no sign of abating because the market is increasingly convinced that the US Federal Reserve will start reducing its stimulus programme from next month. Developing countries with big funding deficits are taking the most heat.
The rand, already the biggest faller this year among emerging currencies, hit six-week lows versus the dollar, with the pressure on it exacerbated by the threat of fresh labour strife.NextMAds
“We see the dollar being bid against emerging currencies and US yields pushing higher. Those currencies where there are concerns about outflows from stocks and bonds are getting hit most,” said Guillaume Salomon, a strategist at Societe Generale.
“India and South Africa are the two currencies that are most at risk... The end game is that as long as the currency trades with a weak bias, concerns about outflows will remain.”
The Indian rupee hit a new record low against the dollar , impervious to the policy steps taken in its defence, while Indonesia’s rupiah sank to four-year lows after data showed the country is running a bigger than expected current account deficit.
Both currencies fell more than 1% while credit default swaps (CDS) on the State Bank of India, used as a proxy for the sovereign, jumped 45 basis points.
Stock and bond markets in both countries suffered heavy losses, with the Jakarta index down 3% and Mumbai losing 2%. Ten-year bond yields in both countries surged to 2011 highs .
Broader emerging equities fell to 10-day lows.sixthMAds
Johannesburg stock markets stayed close to record highs but in dollar terms the index has lost more than 11% this year. South African bond yields rose to one-year highs.
In emerging Europe, the Polish zloty was the biggest loser, falling almost half a percent to the euro.
The Turkish lira is in focus ahead of Tuesday’s central bank meeting, which some think could yield a 75 basis point widening of the interest rate corridor, although most expect no change.
Turkey’s currency defence has been seen as successful, with the lira flat against the dollar on Monday, despite a current account gap that is bigger than in India.
Citi analysts noted that the average weighted funding cost in Turkey is now 6.5%, effectively 200 bps worth of tightening since May, but they said more would be needed.
“Will the central bank continue on a correct mini-hiking cycle? The market is punishing current account gap countries in need of a balance of payments rebalancing and also suffering some degree of inflation rebound,” Citi said.
“If the central bank continues to give signals of strong reluctance to normalize its monetary policy , lira will likely respond to that with further weakness.”
In Egypt, stocks fell 0.3% adding to the 5.5% losses in the previous two sessions. The 2020 bond fell further to bid around 82 points, a six-week low, according to data from Tradewebb. The Cairo stock market fell 3.9% on Sunday when it reopened after hundreds of people were killed in a crackdown by the army-backed government on supporters of the Muslim Brotherhood
