(Jan 3): Most emerging market currencies slipped on Tuesday as the dollar regained footing on concerns about the global economy and path of US interest rates, although equities made headway on optimism over an easing of China's stringent COVID measures.
The Hungarian forint, the South African rand and the South Korean won all weakened as the dollar jumped ahead of key US economic data this week that could influence expectations around the Federal Reserve's interest rate hikes this year.
However, China's yuan closed at a more than four-month high in onshore trading on hopes that the dismantling of its Covid prevention protocols will boost economic growth. The offshore yuan also touched an over four-month high before giving up some gains.
The gains came even as a survey showed China's factory activity shrank at a sharper pace in December as surging Covid-19 infections disrupted production and weighed on demand after Beijing largely removed anti-virus curbs.
After a torrid year for emerging market assets, investors are hoping the Fed's potential shift to smaller rate hikes, easing of price pressures and easing of China's COVID restrictions could boost risk appetite.
"EM currencies may enjoy more near-term relief from the moderating US dollar, on hopes that the expected Fed pivot would materialise later in 2023," said Han Tan, chief market analyst at Exinity Group.
"However, EM currencies may face strong headwinds should the global economic outlook grow darker amid heightened recession fears and if China's much-anticipated rebound disappoints."
For much of the global economy, 2023 is going to be a tough year as the main engines of global growth — the United States, Europe and China — all experience weakening activity, the head of the International Monetary Fund said on Sunday.
However, the MSCI's EM stocks index rose 0.6% on Tuesday, aided by a jump in Shanghai, Hong Kong and Taiwan shares.
Meanwhile, Turkey's lira was little changed, trading near 18.72 per dollar, after data showed annual inflation slid to a below-forecast 64.27% in December, dropping because of a favourable base effect after hitting a 24-year high in October.
The lira was among the worst performing EM currencies of 2022, having shed nearly 29% in value and hit a record low 18.84 per dollar, due to the central bank's monetary easing measures despite sky-high inflation.
"Looking ahead, meaningful disinflation this year is not very likely as we see inflation at around 50% (pa) in 1Q and 40%(pa) in 2Q, which represents a less favourable path than the CBT's latest forecast trajectory," Citi economist Ilker Domac told clients.
In emerging Europe, the Hungarian forint weakened against the euro, while other currencies held steady ahead of the Fed's monetary policy meeting minutes and monthly jobs data out this week.