South Africa's rand leads EM forex lower amid US-China trade caution

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BENGALURU (Oct 16): Fresh strains in China-US relations put an index of emerging market currencies on course for its worst day in a month on Wednesday, with South Africa's rand leading losses after the country's state utility announced a nationwide power cut.

Emerging market stocks, meanwhile, were steady as losses in mainland China and Turkey were countered by gains elsewhere in Asia as well as in Russia.

The rand lost as much as 1.1%, the most among commonly watched emerging market currencies in European trading hours, after state power utility Eskom said it would cut power in Africa's most industrialised nation due to a shortage of generating capacity.

The planned blackout would be the first since a debilitating round of power cuts in February and March pushed South Africa's first-quarter economic growth into contraction and raised the likelihood of the country losing its last investment-grade rating.

"The fact that they have to cut power suggests that troubles may be even worse than expected, and that will cost the government even more to bail out Eskom," said Per Hammarlund, chief EM strategist at SEB.

"And if they can't maintain production enough for demand, the (economy's) growth outlook may get cut, which will cause the currency to sell off."

Market optimism over a partial US-China trade deal announced last week ebbed after a Bloomberg report said China will struggle to buy US$50 billion of US farm goods annually unless it removes retaliatory tariffs on American products, which would require reciprocal action by US President Donald Trump.

Further worsening fragile ties between the two countries, Beijing said it resolutely opposed new measures related to pro-democracy protests in Hong Kong passed by the US House of Representatives and urged lawmakers to stop interfering.

"I think markets are waiting to see how China will respond to (the legislation) and how much it will impact the trade negotiations more broadly," SEB's Hammarlund said.

China's yuan, the South Korean won, Russia' rouble all fell, taking MSCI's index of developing market currencies down 0.3% against a steady US dollar.

Turkey's lira rose 0.6%, looking to post its best day in a month, but hovered at near four-month lows hit after President Tayyip Erdogan refused US demands to declare a ceasefire in northeastern Syria.

US Vice President Mike Pence will meet with Erdogan in Ankara on Thursday with the prospect of further sanctions looming.

Turkish stocks were led lower by a 5.5% slump in majority state-owned Halkbank after US prosecutors charged the lender with taking part in a multi-billion dollar scheme to evade US sanctions on Iran.

Concerns about global growth also remained a factor after the International Monetary Fund on Tuesday cut its world growth forecast for 2019 for the fifth time to a 10-year low of 3%.