Indian yields jump to ‘highest’ after Reserve Bank holds rates – Rand leads emerging market currencies

LONDON, Oct 5, (RTRS): Emerging currencies broadly weakened on Thursday, with South Africa’s rand down 0.3 percent against a marginally firmer dollar, after a stark warning from the central bank over the government’s failure to tackle corruption.

Earlier, Indian yields jumped to the highest since June after the central bank left interest rates on hold and raised inflation forecasts.

JPMorgan’s currency index, the ELMI Plus, touched a one-week high on Wednesday but was well off the three-year highs it hit in September as clear signs of US economic recovery are seen triggering a Fed interest rate rise in December.

MSCI’s main emerging equity index was flat after four days of gains, trading just off 10-day highs.

On currency markets, the rand slipped back towards recent five-month lows while the rouble shed 0.2 percent. Other emerging currencies seesawed just below flat as investors awaited US jobs data due on Friday.

“I don’t think this is the big turn in emerging markets though we may have hit a patch when EM currencies are likely to weaken for a while. They have ridden on the coat tails of the dollar, now the dollar looks like it will appreciate and EM is reacting to that,” UBS strategist Bhanu Baweja said.

While expecting emerging markets to withstand the pressures, he highlighted “weak links” as countries reliant on overseas dollar financing and revenues from a slowing China.

South Africa fitted that bill, Baweja said, noting that while the country did not have much dollar debt, it received overseas dollar inflows into its financial markets and its terms of trade were determined by commodity prices.

“Then there are the idiosyncratic factors such as domestic politics and credit risks. Also the bulk of current account improvement and terms of trade gains are behind us,” he added.

Central bank governor Lesetja Kganyago said on Wednesday that the lack of action against graft signalled South Africa was not serious about tackling corruption and the policy uncertainty was hampering growth.

The Czech crown approached a November 2013 high against the euro ahead of inflation data next week that could set the stage for an interest rate rise in November. Czech bond yields surged to the highest since Sept 2014.

“Fundamentals remain extremely supportive of further crown appreciation. The Czech Republic is the only (central European) country where tight labour market conditions have translated into core inflation running above target,” UniCredit analysts said, predicting a rate rise in November, followed by three more in 2018.

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