Emerging currencies suffer hefty losses

Emerging currencies suffered hefty losses yesterday, with the South African rand tumbling more than 1% at one point as investors sold down assets deemed most vulnerable to tighter global monetary conditions.Global markets face a squeeze in coming months as the US Federal Reserve starts unwinding its balance sheet and raises rates further,l while the eurozone too has hinted at reducing stimulus.That recently lifted Treasury and German yields to two-month highs and six-month highs respectively.While emerging equities are seen as relatively resilient due to firmer growth and earnings, especially in Asia, currencies are likely to be at the sharp end, with the Turkish lira and South African rand regarded as vulnerable due to current account deficits and messy internal politics.The rand hit two-month lows while the lira lost almost 1% to trade just off recent 2-1/2 month lows.The rouble, meanwhile shrugged off a slight oil price rise to also lose 1% to a new six-month low.“A couple of things are changing.If you look at most of G10s there is a rise in real yields and it effectively indicates the period of abnormally low interest rates is coming to an end.That’s leading to reappraisal of what’s good value in G10 as well as emerging markets,” said Peter Kinsella, head of research at Commonwealth Bank of Australia“Second is oil prices — Opec is talking of further supply cuts which shows they are finding it hard to balance markets.Falling oil prices are net-net positive for G10 and net-net negative for EM.”Kinsella said, however, that while currencies were the first line of defence, emerging equity and debt markets were supported by valuations which are less rich than during the 2013 selloff.Also within emerging currencies, jitters over threats to the South African central bank’s independence and a continued crackdown in Turkey on people suspected of involvement in last year’s failed coup were exacerbating risks for these markets.Asian currencies on the other hand were relatively solid, with the rupee and Korean won slipping only marginally.JPMorgan said it had turned underweight in many EMEA emerging currencies, but named the rand its “hedge of choice” due to domestic as well as external risks.“The political climate in South Africa is likely to remain excessively noisy till the end of the year, tail risks of local bond ratings downgrades are growing, and investors till now have been too sanguine on the outlook for local markets,” JPM said in a note to clients.However, MSCI’s benchmark emerging equity index rose 0.7% as shares tracked global stocks higher.In bond markets, Indonesia continued to market bonds, even adding a euro tranche to the two-dollar tranches, quoting its 10-year dollar note at 4.25%. Societe Generale strategist Regis Chatellier said he had adjusted his portfolio in favour of shorter-duration emerging debt especially in central Europe, to guard against the rise in core rates. “After such a long rally a reduction in balance sheets is going to hurt a bit,” he said.