Traders Look for Serious Clues About EM Currency Bounce

For all the concern that there’s a crisis brewing in some developing economies, emerging markets are showing resilience going into the final week of May, thanks to the dollar’s recent pause and a drop in US yields.

That may all change should Friday’s payrolls data fan speculation that the Federal Reserve will accelerate the pace of interest rate increases. But Turkey apart, investors are saluting a week in which emerging-market currencies had their biggest gain since March and local currency bonds strengthened for the first time in seven weeks as US 10-year yields slipped back below 3%. Still, stocks extended the previous week’s losses, Bloomberg reported.

“The key driver for emerging markets will continue to be exogenous factors, in particular the performance of the US dollar and US rates, which have been key headwinds for our asset class in recent weeks,” said Paul Greer, a London-based portfolio manager at Fidelity International.

Purchasing managers indexes from across emerging markets will provide clues on the health of the global economy and influence policymakers’ thinking. Investors will also closely watch how central banks will respond to any return of currency weakness.

Turkey’s central bank on Wednesday raised one of its key interest rates by 300 basis points in an emergency meeting after the lira plunged to new lows. Turkey is scheduled to release trade balance data on Thursday.

Elsewhere, Central European rates and currencies, especially Poland’s and Hungary’s, won’t be immune to the pressure on European peripheral debt, Greer said.

“If markets stabilize, you may see investors get a little more optimistic and try to jump in to pick up some values,” said Eric Stein, a Boston-based co-director of global income at Eaton Vance Corp., which manages $430 billion of investments. “If things keep selling off, investors may get even more skittish.”

Data Dump

- China, the largest emerging market, will release its manufacturing PMI for May after some data this month indicated economic momentum in the Asian nation broadly held up in April. Manufacturing PMI may come in at 51.4 in May, according to Bloomberg survey of economists. The yuan has been the best EM performer in Asia this year after Thailand’s baht.

- Brazil, Mexico, Taiwan will also release PMI data

- Brazil, Croatia, Czech Republic, India, Poland will unveil GDP reports

- Poland, Peru, South Korea, Thailand to announce CPI

- In South Africa, data on money supply, credit growth and producer-price inflation may provide clues on the outlook for monetary policy. Reports on the trade balance and manufacturing may shed light on the health of the economy. The rand had its best week since February as traders weighed a more hawkish policy

 - Kenya’s central bank will probably cut rates on Monday, according to economists surveyed by Bloomberg; the shilling declined 0.7% last week, among the worst-performing African currencies

- Guatemala will also decide monetary policy this week

- Investors will watch for any further development between the US and North Korea after the Asian country said it was surprised by President Donald Trump’s decision to cancel a June 12 summit with Kim Jong-un and it remains willing to meet with the US at any time; Trump said on Saturday his administration is holding direct talks with North Korea to salvage the summit planned for Singapore.

Negotiations in Latin America

Latin American observers will be focused on a slew of important negotiations this week involving the region’s three largest economies--Brazil, Mexico and Argentina.

In Brazil, the senate is expected to vote Tuesday on whether to turn into law payroll and diesel tax breaks announced by the government last week as part of talks to end a trucker strike that has caused fuel shortages, flight cancellations and even triggered some supermarkets to limit purchases.

Mexican officials will fly to Washington this week to try to strike a deal on Nafta amid pressure from the US over possible auto tariffs. Mexican investors will also get guidance from the central bank with the release of minutes from the last meeting, when benchmark rates were kept unchanged. Emerging-market central banks have been pressured to step up efforts to protect their currencies given the recent rout.

Argentine authorities, meanwhile, are set to continue negotiating a credit line from the International Monetary Fund. They’re said to be seeking a “rapid” conclusion.