EM bears shrug off central bank opening salvos

Sao Paolo • While Indonesia’s rupiah was the best-performer among major emerging currencies last Thursday after the central bank raised rates and pledged “stronger measures”, those gains were wiped out last Friday as it led losses among peers.

Brazilian policymakers got a cooler reception, with the real slumping to a two-year low following their surprise decision to end a cycle of interest-rate cuts just a month after signaling another reduction was in the offing.

The nations are at the forefront of a global turn toward tighter monetary policy in developing nations as a surging dollar and the highest 10-year US Treasury yields since 2011 pressure policymakers to find ways to retain foreign capital.

The starkest example has been in Argentina, where officials seem to have put a stop to the rout in the peso after hiking rates by 12.75 percentage points in just over a week among other steps to restore credibility.

“The dollar and US yields are key,” said Piotr Matys, a Rabobank strategist in London who was among the most accurate forecasters for four developing-nation currencies in the first quarter. “They’re still setting the tone for EMs.”

That was evident in Brazil, when a stronger dollar and rising yields over- whelmed the central bank’s unexpected decision last Wednesday to keep interest rates unchanged at 6.5%.

Even as traders and analysts welcomed the move, the real weakened for a fifth day and fell further, weakening 1.5% to 3.7516 per dollar as of 11:03am in New York last Friday.

This extended the drop this year to 10%, among the worst in EMs.

“The Brazilian central bank’s surprise decision not to cut rates is a hopeful sign of policymakers’ potential willingness to make sacrifices,” Alvise Marino and Shahab Jalinoos, foreign-exchange strategists at Credit Suisse in New York, wrote in a note.

Still, “we are not convinced radical action sufficient to change market perceptions” is on the table, they said.

Indonesia’s central bank increased its key rate by a quarter percentage point to 4.5% last Thursday and governor Agus Martowardojo pledged to act “pre-emptively” to restore confidence in financial markets.

The rupiah rose for the first time in three days, but resumed losses last Friday, reaching its weakest level since October 2015.

The central bank will need to raise borrowing costs again in two to three months to ease selling pressure, said Jeffrosenberg Tan, the head of investment strategy at Sinarmas Sekuritas, a brokerage and asset-management firm in Jakarta.

“Central banks across EMs are now on the offensive,” Stefan Hofer, chief investment strategist at LGT Bank

Asia, said in an interview with Bloomberg Television. “Policymakers are responding to the pressures on their currencies.”

The MSCI EMs Currency Index is heading for its sixth loss in the past seven weeks, helping fuel concern that weaker currencies will lead to inflation and make debt servicing more expensive for developing nations that have piled on external debt in recent years.

Credit Suisse said the answer to steep sell-offs of currencies is to hike rates rather than wait for US bond yields to stabilise. But it sees little evidence of a sense of urgency across EMs as a whole.

Some central bankers have said as much, indicating they don’t feel pressure to act just yet.

Mexico kept its benchmark interest rate unchanged at the highest level since 2009 last Thursday, saying that while keeping a slumping currency from affecting prices remains its priority, the slowdown in inflation this year is consistent with reaching its target.

Poland’s governor Adam Glapinski said an interest-rate hike would be “inappropriate” last Wednesday after his Monetary Policy Council kept its benchmark rate at a record-low 1.5%. The zloty fell to the weakest level against the dollar since November.

The currency will probably be hurt by the reluctance to hike rates, according to Marcin Lipka, a senior analyst at the brokerage Cinkciarzpl, who added that the bar seems very high for policymakers to change their mind.

He said the zloty may weaken to as low as 3.85 per dollar from 3.64 by the end of the year.

Analysts said Turkey could be the next country to adopt a defensive posture. Foreign investors are shunning lira assets thanks to an inflation rate of 10.9% and a widening current-account deficit.

The lira’s 15% drop this year is putting pressure on the central bank to deliver a rate hike, seen as the best policy to arrest the decline.

“Turkey will hike, for sure,” said Guillaume Tresca, a strategist at Credit Agricole in Paris. “The question is how much. I’m not sure it will be enough to stabilise the lira.” — Bloomberg