Central banks step in after currencies slump, Egypt stocks dive as crisis deepens
Tuesday, 9 July 2013 00:32
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LONDON (Reuters): Emerging currencies slumped to multi-year or record lows versus the dollar on Monday, forcing some central banks to step in after robust US data boosted the greenback, while Egyptian stocks dived after renewed violence in Cairo.
The Turkish central bank reacted to the lira’s fall to a fresh record low by pledging “strong additional monetary tightening”, allowing the currency to recover 0.7%. It also opened an auction to sell $ 250 million.
Earlier, the Indian rupee hit a record low versus the dollar forcing the central bank to come to its defence while other currencies including the Korean won, Thai baht and Philippine peso fell to multi-month lows, losing 0.7-1.1%.
“The rebound on the dollar and US rates is impacting emerging markets today and we are going to see countries with large current account deficits such as Turkey and India coming under a lot of pressure,” said Guillaume Tresca, a strategist with Credit Agricole in Paris. “It’s becoming much harder to refinance current account deficits in this environment,” he added.
The dollar and US Treasury yields are being buoyed by expectations the Federal Reserve will start paring back its $ 85 billion monthly stimulus this autumn and raise rates as early as end-2014 as Friday’s jobs data was better than anticipated.
Countries such as India, Turkey and South Korea are being hit by a double whammy as their currencies depreciate but dollar-based oil import bills remain elevated, given unrest in Egypt is keeping crude prices well above $ 100 a barrel.
“The (Turkish central bank) had a choice, let the lira go weaker to the detriment of already high inflation, blow scarce FX reserves in defence of the lira, or tighten policy,” Standard Bank analyst Tim Ash said in a note.
Domestic bonds also suffered, as yields in India and South Africa rose 10-13 bps. September futures on Korean benchmark debt eased 0.3 points, almost matching recent one-year lows.
Egypt’s stock market was down more than 2% as the crisis there deepened with state media reporting that dozens of people had been killed in violence at the headquarters of the Republican Guard while the Muslim Brotherhood called for an uprising after being ousted from power by the army. Egyptian debt insurance costs were untraded so far on Monday according to Markit, but credit default swaps closed Friday at 785 basis points, down 140 bps from record highs hit earlier in the week.
Emerging equities fell 1% to two-week lows, dragged lower by China where leading Shanghai and Shenzhen A-shares ended down 2.8% after authorities pledged to cut credit to sectors plagued by overcapacity. Other big Asian markets in Seoul, Taipei and Mumbai also fell around 1%.
Russian stocks however gained 0.6%, buoyed by oil prices above $ 108 a barrel, the highest in three months. Central European markets were less affected by the selloff, as they tracked gains on Western European stocks which recovered on back of Portugal’s easing political crisis and Greece which looks set to reach a deal with lenders.
