Emerging markets currency rout abates as policymakers offer support

RIO DE JANEIRO/LONDON (REUTERS) - A sharp emerging market sell-off appeared to subside on Thursday as Latin American currencies opened higher while Russia's rouble and Turkey's lira rebounded after policymakers pledged to take any necessary measures to stabilize their markets.

Investors were on the watch for additional dollar outflows from developing nations but traders said recent panic selling had abated for now as markets digested the US Federal Reserve's widely expected decision to cut bond purchases by another US$10 billion (S$12.74 billion) on Wednesday.

"We do accept the idea that the Fed reducing its asset purchases begins a change in the overall investment climate, but it is really a transition phase," analysts with Brown Brothers Harriman wrote in a research note.

Worries about China's economic slowdown still left investors walking on eggshells as an index of business conditions for Chinese manufacturers dipped for the first time in six months.

Many emerging countries, including Brazil and Chile, greatly rely on commodities exports to China.

But, from Istanbul to Moscow and Brasilia, a fresh round of central bank actions and verbal intervention offered support to emerging market currencies.

The rouble came off a record low against the euro and its lowest level in nearly five years against the dollar after the Russian central bank said it would make unlimited interventions if the exchange rate strays outside of its target corridor.

A Reuters poll of economists found that the Russian currency is expected to firm by mid-year to 34 per dollar after some short-term turbulence. It last traded at 34.92 per dollar, 0.4 per cent stronger on the day.

The lira rose 0.6 per cent after the Turkish central bank said it may further tighten liquidity if necessary after massively raising all of its interest rates late on Wednesday.

Romania's leu climbed 0.4 per cent against the euro after the central bank intervened indirectly in the market. Even in India, whose currency has not sold off as much as its peers, policymakers pledged to take all necessary steps to ensure stability in the country's financial markets.


On the other side of the Atlantic, the Brazilian real gained 0.4 per cent after the central bank announced it would auction US$2.3 billion on the spot market on Friday through repurchase agreements.

The offer, which is intended to roll over similar dollar lines that expire next month, underscores Brazil's commitment to supporting liquidity in its foreign exchange market.

Other Latin American currencies were also in the black, with the Mexican peso gaining 0.7 per cent and the Chilean peso 0.5 per cent stronger.

Emerging market stocks mostly rebounded, erasing losses in the benchmark MSCI index for the asset class, which had earlier fallen to a 4-1/2 month low. The Latin American portion of the index gained 0.9 per cent.

The recent emerging markets rout gained traction as many investors fled the asset class, deeming returns too low in comparison to the rising yields in safe-haven US Treasuries.

Much of those outflows, however, have been triggered by retail investors who are usually more averse to short-term volatility.

"Institutional investors have remained faithful (but) it may be that some of these positions are starting to crack," said Mr Manik Narain, emerging market strategist at UBS.

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