Emerging market currencies find breathing space as dollar eases slightly

REUTERS: Emerging market currencies came off session lows on Monday, as the dollar eased slightly after a strong rally spurred by rising bets of the US Federal Reserve staying aggressive with its monetary policy.

With the exception of the Indian rupee and the Taiwan dollar, most Asian currencies cut almost all session losses. The Chinese yuan inched up, with data showing an unexpected pick-up in exports in July aiding sentiment. Export forecasts from China, however, were clouded by worries about weakening global demand.

Elsewhere, Turkey’s beleaguered lira fell 0.2%, while South Africa’s rand climbed 0.5%. Russia’s rouble rose to trade around 60 per dollar.

The greenback fell about 0.2%, but stayed at elevated levels after data on Friday showing strong labour demand in the United States saw bets for another 75 basis points hike by the Fed in September rise to around 70%. Focus now turns to US inflation data due later this week. The headline number is seen having cooled in July.

“There’s still this very precarious risk backdrop,” said Monex FX analysis Head Simon Harvey.

“We are still seeing volatility in emerging market space this morning, but it’s not necessarily too indicative of an overall trend just yet,” he said, adding that Monex expects a Fed “pivot,” or the easing of its tightening cycle, in the fourth quarter which could then lend some support to emerging markets.

Despite a stronger euro, Hungary’s forint rose 0.4% to stay at two-month highs, while the Polish zloty climbed 0.3%. Both had a strong week last week, but analysts at ING see some pain ahead.

“We expect both currencies to be weaker this week. We see the forint as more vulnerable, with our target at 399 EUR/HUF and the zloty at 4.75 EUR/PLN for the days ahead,” said ING EMEA FX and FI strategist Frantisek Taborsky.

Inflation figures from Hungary, the Czech Republic and Romania will also be eyed this week.

Among stocks, MSCI’s index of emerging market equities snapped a threeday winning run thanks to losses in Chinese bluechips and Hong Kong stocks. But strong gains in India, as well as outside Asia, helped cap losses for the broader index.