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Emerging market currencies slip after worst week since 2016

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Emerging markets currencies faced further selling on Monday on the heels of the worst week in more than a year, with a resurgent dollar and a slew of local issues sparking jitters among investors. 

In European action on Monday, the JPMorgan emerging markets currency index slipped 0.29 per cent. 

The Turkish lira faced the heaviest fall on Monday, sliding 0.85 per cent on the buck, with a dollar buying 4.2624 lira. South Africa’s rand was the second biggest faller, down 0.44 per cent on the greenback, while the Philippine peso, Russian rouble and Indian rupee were each off roughly 0.4 per cent.

Emerging market currencies came under “ intense selling pressures last week,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. JPMorgan’s currency gauge fell 1.7 per cent over the period, the worst fall since Donald Trump’s shock election victory sparked severe market ructions. 

US Treasury yields have pushed markedly higher over the past month, with a robust economy expected to prompt the Federal Reserve to increase interest rates a total of three to four times this year. In fact, the 10-year climbed from 2.73 per cent at the start of April to above 3 per cent by April 25. 

Higher yields take some of the polish off of the carry trade, in which investors borrow in lower-yielding countries to buy debt in higher-yielding ones. The trade has been a boon for demand of EM currencies, according to analysts. 

At the same time, several EMs have also suffered from idiosyncratic issues. 

Argentina is facing a crisis of confidence, with investors worried that even after the central bank hiked borrowing costs 27.25 to 40 per cent just seven days it may not be sufficient to stop rapid inflation. 

Turkey has been burnt by similar concerns. Inflation there is running at above 10 per cent a year, more than double the central bank’s target. However, the government of Recep Tayyip Erdogan has continued injecting fiscal stimulus ahead of snap elections in June. 

Mr Chandler said he reckons EM currencies will “remain under pressure”. He added that investors will watch US producer and consumer price inflation data, due out on Wednesday and Thursday respectively.

– Copyright The Financial Times Limited 2018

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