Expectations of central-bank interventions are helping to steady emerging-market currencies, even as traders adjust to a higher-for-longer regime for developed market interest rates.
US and European moves to tame inflation have prompted investors to exit some riskier emerging assets this year. But emerging markets’ recent efforts to defend their currencies have put a floor under declines — even as US consumer price index data Wednesday left the door open for additional interest-rate hikes from the Federal Reserve.
China, for instance, has ramped up its fight against yuan bears after the currency slumped to near record lows offshore, while an aide to Poland’s prime minister has also weighed in in support of the zloty.
A gauge of developing-nation currencies gained 0.2% overall after the US data, while emerging-market stocks slid just 0.1% for the session, erasing earlier losses.
US data Wednesday showed underlying inflation ran at a faster-than-expected monthly pace in August, adding to concerns that the renewed momentum in the economy is reigniting price pressures.
Traders have also ramped up wagers that the European Central Bank will deliver a quarter-point interest-rate hike amid growing concerns that the euro area faces persistently high inflation. That would especially hit currencies in the east of the European Union, where central banks are at various stages of easing cycles despite lingering price pressures.
“Risks that the Fed and the ECB will remain hawkish for longer have put sentiment in emerging markets on the back foot,” said Marek Drimal, a London-based strategist at Societe Generale SA. “In addition, inflation pressures in several EM countries continue to be elevated.”
The zloty’s travails after an unexpectedly large interest-rate cut a week ago reached the point where officials felt the need to intervene, after they initially played down the issue. The government has the tools to strengthen the currency back to an “optimal level,” an adviser to the prime minister said Wednesday.
The zloty reversed the day’s losses after the comments to Bloomberg, paring its decline since the beginning of last week to just 1.2% against both the euro and the dollar. It was one of the biggest gainers among 23 developing currency peers tracked by Bloomberg.
The forint traded in a tighter range than its Polish peer after the central bank in Budapest gave a strong indication that it was cutting its key rate by 100 basis points this month via tweaks to its two-tiered rate regime. Unlike the shocker from Warsaw, that move has been well telegraphed by Hungarian policymakers.
Elsewhere, data showed inflation soared beyond expectations in Argentina last month after an abrupt currency devaluation deepened the nation’s economic crisis before a presidential election in October. Consumer prices rose 12.4% in August from July, the highest monthly increase since 1991 when the country was exiting hyperinflation. Still, the central bank will likely keep its key interest rate unchanged at 118% on Thursday.
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