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Falling Dollar Bets Send Signal of Hope to Emerging-Market Bulls

Chinese one-hundred yuan banknotes and U.S. dollar banknotes are arranged for a photograph in Hong Kong, China on Monday April 15, 2019. Photographer: Paul Yeung/Bloomberg

Investors looking for a weaker dollar to provide a fresh spur to emerging markets may be about to get their wish.

Bets that the U.S. currency will strengthen against its major counterparts slipped last week to the lowest level since the start of July, according to CFTC data. MSCI Inc.’s index of developing-nation currencies managed to stem a three-day decline Friday as President Donald Trump said there was a “good chance” of a phase-one trade deal that would avert the next scheduled increase in U.S. tariffs.While risk appetite remains beholden to the chances of a U.S.-China trade agreement, signs of a manufacturing recovery, improved corporate earnings and accommodative monetary policy from central banks are helping to buoy sentiment toward emerging markets. Portfolio flows into developing nations remained positive for a sixth straight week last week, boosted by bond buying, according to Credit Agricole SA.
MSCI's EM currency gauge stays above 200-day moving average

“The key to strong emerging-market local performance in 2020 will be a weak dollar,” said Eric Stein, the Boston-based co-director of global fixed income at Eaton Vance, which manages about $480 billion in assets. “It’s actually very impressive how well the EM local asset class has done in 2019 based on carry and duration without a weaker dollar. The outlook for EM is broadly pretty good.”

READ: A Breakthrough on Trade Can Push Treasury Yields Only So High

As always, risks abound across the world’s developing economies, underscored most recently by political turmoil in Chile, Lebanon and Hong Kong. With markets still on edge over the trade dispute, Chinese state media stepped up its criticism of what it called American interference in its domestic affairs over Hong Kong.

Less Urgency to Ease

  • South Korea’s central bank is set to join other emerging market central banks that are proceeding more cautiously on further easing
    • Bank of Korea policy makers will probably hold the benchmark rate at 1.25% on Friday after reducing it at the last meeting in October. The rate matched a previous record low that was reached in 2017
    • “Recent data suggest growth is stabilizing, albeit at a weak level, thereby reducing the urgency for further easing,” Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, wrote in a note
    • Twenty of the 32 central banks monitored by Morgan Stanley eased policy in 2019 and the bank’s economists forecast 13 will cut rates in 2020. Easing concentrated in emerging markets will help to reduce the global weighted average policy rate to a seven-year low by March. India, Brazil, Indonesia and Turkey can all strike if they need to
  • Policy makers in Israel and Kenya will probably lower rates on Monday, while their counterparts in Ghana and Nigeria are set to keep borrowing costs on hold this week
  • Central banks Mauritius and Angola will also decide on policy

Economic Data and Events

  • China unveils its first economic indicators for November on Saturday, with the official readings on manufacturing and non-manufacturing PMIs. Signs of a recovery in activity could provide fresh impetus to markets amid concerns over a potential delay in the signing of a phase one trade deal between the U.S. and China
  • India’s GDP, due Friday, probably slowed further last quarter, according to a Bloomberg survey of economists.
    • READ: India Is Heading for Growth Below 5% as Outlook Deteriorates
  • Protest-hit Lebanon is due to repay a $1.5 billion Eurobond on Thursday. Central Bank Governor Riad Salameh said his country has the money
  • Mexican gross domestic product data for the third quarter, to be released Monday, will probably indicate a sputtering economy. On Tuesday, President Andres Manuel Lopez Obrador will likely announce as many as 1,600 infrastructure projects at his daily press conference. Banxico is set to update its estimates for growth and inflation through 2020 on Wednesday and will release minutes from its November meeting on Thursday. The peso is Latin America’s only currency that has gained so far this year
  • Brazil’s current-account deficit probably deepened in October, data on Monday are expected to show. The real is among the biggest losers in emerging markets in 2019
  • Investors will study Argentina’s economic activity index reading Tuesday as they await clarity on economic policy and a cabinet under President-elect Alberto Fernandez
  • Chilean unemployment and copper-production figures, due for release on Friday, will be watched for clues on how weeks of social unrest are impacting the economy. The Chilean peso dropped almost 7% so far this month

–With assistance from Tomoko Yamazaki, Alec D.B. McCabe and Paul Wallace.


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