Forex traders bet on year-end emerging markets rally Currency speculators are betting on an end-of-year rally in emerging markets, as the weak dollar fuels a revival of carry trades in higher-yielding currencies. Long positions taken by active investors in Asia-Pacific currencies are at the highest level since the start of 2012, while long positions in emerging markets currencies are the highest in a year, according to a Citigroup analysis. More ON THIS TOPIC EU regulators to focus on banks’ lending On Wall Street Taper delay could push stocks and bonds higher Fed reveals weak spot in superhero powers John Authers Fed still has cred but taper bulls do not IN CURRENCIES Emerging markets rebuild forex reserves China and Singapore agree renminbi pact US dollar faces a testing period Dollar biggest victim in US debt drama The swing in favour of riskier assets reflects expectations that the US Federal Reserve will maintain its stimulus programme at least until the start of next year while it assesses the damage done by the US government shutdown. With the dollar close to a two-year low against a basket of rivals, dollar-funded investments in high-yielding assets are more attractive. “The market can safely price the Fed to be on hold through the end of the year and potentially January,” wrote strategists at Credit Suisse, noting that emerging markets had outperformed G7 currencies since the end of September. Some of the biggest gains have been in currencies that suffered heavy selling in July and August, as investors fled countries vulnerable to a sudden withdrawal of the Fed’s “easy money”. The Indonesian rupiah has risen 2.4 per cent against the dollar since the start of October, the South African rand 3.6 per cent and the Turkish lira 1.8 per cent. Some think the shift in sentiment is sufficient to tempt institutional funds that pulled out of emerging markets earlier in the year. “We needed a big bang to see real money back in the game. We believe we just had it,” wrote strategist at Citi. In depth Emerging markets in retreat Currency wars Emerging markets had taken a battering as investors withdraw at the prospect of higher global interest rates However, the rally stalled on Wednesday, with many Asian currencies slipping as fears of a liquidity squeeze in China’s financial system rattled markets. Another risk is that authorities forced to intervene to prop up their currencies in recent months – including Brazil, India and Indonesia – may now scale back support. Other governments would like a weaker currency: to help exporters compete with regional rivals. The South Korean won hit a nine-month high on Wednesday, although traders believe the country’s central bank has been intervening heavily in recent weeks to limit the won’s appreciation. Traders are already nervous at hints by Brazil’s central bank that it might reduce a swaps programme supporting the real. India’s central bank has trimmed its marginal lending rate since the rupee stabilised and Indonesia’s central bank has stopped raising interest rates. Investors are also alert to the longer-term challenges facing emerging markets. “Growth is weak and fundamentals are shaky,” argue strategists at Morgan Stanley, who say the recent price movements are more about dollar weakness and leave emerging market currencies exposed to any improvements in US data. They expect only a shortlived, tactical rally, saying: “Policy makers have not made the adjustments necessary to cater to a rebalanced global economy.” Origin of post FT
Posted on: Thu, 24 Oct 2013 12:09:27 +0000