LONDON, Oct 17 (Reuters) - Emerging market currencies such as the Turkish lira and Chinese yuan were squeezed by a stronger dollar on Tuesday after reports that a policy hawk could be the next U.S. Fed chair, while emerging stocks slipped off a six-year high.
The dollar firmed 0.2 percent against a basket of currencies to the strongest in a week and U.S. 2-year Treasury yields jumped to their highest since 2008 after U.S. President Donald Trump met Stanford University economist John Taylor to discuss the job of Federal Reserve Chair.
Taylor is known as a proponent of a rule-based monetary policy and according to his formula, the Fed funds rate needs to be much higher than the current target of 1.0-1.25 percent.
A hawkish Fed could prompt investors to shift into U.S. assets on the prospect of better yields, triggering capital outflows from emerging markets.
“Over the last three weeks, our official line has been stay away from dollar/EM as there is some uncertainty on the U.S. fiscal and monetary front ... and the market is wondering who next Fed chair will be,” said Kiran Kowshik, an emerging FX strategist at UniCredit. “Positioning in long EM FX is quite stretched.”
Emerging currencies such as the Turkish lira and Chinese yuan sold off the most, weakening some 0.4 percent.
Kowshik said although the lira was undervalued, the external balance of payments was quite weak and there weren’t sufficient inflows to cover the current account deficit. The visa ban spat with the United States has also weighed on the lira.
China’s yuan fell to a one-week low, slipping below a key threshold of 6.6 per dollar in the wake of a weaker official midpoint and higher corporate demand for dollars. Investors remain cautious ahead of China’s twice-a-decade party congress starting on Wednesday.
Other currencies traded flat or slightly lower, with the Mexican peso hovering near a five-month low hit on Monday.
The peso has shed about 4.5 percent this month, with Mexico’s finance minister blaming the depreciation on uncertainty around trade treaty renegotiations and questions over the pace of Fed tightening.
The Trump administration, which is demanding significant changes to the North American Free Trade Agreement (NAFTA), has presented a series of hard-line proposals that partners Canada and Mexico say will be tough to accept.
The Russian rouble held its ground, helped by higher oil prices as fighting between Iraqi and Kurdish forces threatened supplies from northern Iraq while political tension rose between the United States and Iran.
In emerging Europe, currencies fared better, with the Czech crown hitting another four-year high against the euro whilst the Polish zloty was trading just off a three-month high ahead of wages and unemployment data.
Emerging stocks slipped from six-year highs, with MSCI’s benchmark emerging equity index down 0.25 percent, ending a five-day winning streak.
Chinese mainland stocks fell 0.2 percent , Russian shares eased 0.4 percent and Hungary and Polish stocks nudged 0.3 percent lower.
But both the South Korean and Philippines bourses powered to record highs. In the former, gains in large tech firms offset market caution about North Korean action as Washington and Seoul began week-long joint military drills.
Philippines stocks were playing catch up as trading resumed after a holiday.
In fixed income markets, Iraqi sovereign dollar bonds were steady after Iraqi government forces captured the major Kurdish-held oil city of Kirkuk on Monday. For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg
Morgan Stanley Emrg Mkt Indx 1128.97 -2.85 -0.25 +30.93
Czech Rep 1054.26 +1.51 +0.14 +14.39
Poland 2525.77 -8.75 -0.35 +29.66
Hungary 38999.74 -120.15 -0.31 +21.86
Romania 8061.27 +28.89 +0.36 +13.78
Greece 761.14 -4.58 -0.60 +18.26
Russia 1152.92 -5.32 -0.46 +0.05
South Africa 51668.25 -45.12 -0.09 +17.69
Turkey 07327.45 +852.99 +0.80 +37.36
China 3373.44 -5.03 -0.15 +8.69
India 32567.42 -66.22 -0.20 +22.31
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 25.76 25.79 +0.09 +4.83
Poland 4.23 4.23 +0.00 +4.03
Hungary 307.77 307.61 -0.05 +0.34
Romania 4.58 4.58 -0.05 -1.05
Serbia 119.04 119.00 -0.03 +3.62
Russia 57.30 57.27 -0.05 +6.91
Kazakhstan 333.58 333.33 -0.07 +0.02
Ukraine 26.46 26.51 +0.19 +2.04
South Africa 13.33 13.31 -0.10 +3.05
Kenya 103.30 103.20 -0.10 -0.90
Israel 3.51 3.49 -0.37 +9.83
Turkey 3.66 3.64 -0.30 -3.53
China 6.62 6.59 -0.44 +4.92
India 64.93 64.70 -0.36 +4.64
Brazil 3.17 3.17 -0.03 +2.57
Mexico 19.03 19.03 -0.02 +8.84
Debt Index Strip Spd Chg %Rtn Index
Sov‘gn Debt EMBIG 306 0 .01 8 05.84 1
Reporting by Claire Milhench; Graphic by Karin Strohecker; Editing by Matthew Mpoke Bigg