Markets set for robust weekly gains on interest rate hikes

Brazil’s central bank beat its peers to the punch with a large rate hike last week

Most emerging market currencies rose on Friday, and were set for a strong finish to a week marked by several interest rate hikes across the space as well as waning fears over immediate policy tightening by the US Federal Reserve.

South Africa’s rand rose 0.3 per cent, leading gains across Europe, the Middle East and Africa (EMEA) as weak overnight US data and the approval of an infrastructure spending bill brought down Treasury yields.

Lower US Treasury yields make emerging market currencies look more attractive.

The MSCI’s index of EM currencies rose 0.3 per cent, and the equity index jumped 0.9 per cent. Both were set to post gains for the week.


A bevy of Fed speakers this week appeared to have convinced markets that a recent spike in inflation would be transient, and that the bank would maintain its massive stimulus program for the time being.

Although the Fed appeared set to maintain an accommodative stance in the near-term, several EM central banks began hiking rates this month to stave off a post-Covid-19 spike in inflation.

Mexico’s peso was the stand out performer this week after the central bank unexpectedly hiked rates to 4.25 per cent. The currency surged 1.6 per cent overnight and was set for a weekly gain of nearly 4 per cent, the most among its EM peers.

“The peso is likely to remain supported, as a central bank that takes its inflation target seriously and behaves in a pro-active manner is positive for a currency,” You-Na Park-Heger, FX and EM analyst at Commerzbank wrote in a note.

In Europe, Hungary’s central bank was the first to kick off a hiking cycle, having raised rates by 30 basis points to 0.9 per cent. The move put the forint on course for a near 2 per cent gain to the dollar.

The Czech crown was set to add 1.1 per cent this week after the central bank raised rates by 25 basis points to 0.50 per cent.

Brazil’s central bank beat its peers to the punch with a large rate hike last week, while hawkish minutes of the bank’s meeting put the real on course for a more than 3 per cent weekly gain.

In contrast, Philippine and Thai central banks held their interest rates as inflation stayed benign, which in turn weighed on the peso and the baht.

For the day, Russia’s rouble lagged its peers as a possible summit between Moscow and European leaders appeared to have fallen through.

Argentine markets were in focus after MSCI said it will reclassify its Argentina index to Standalone Markets status, from emerging markets, citing issues over strict capital controls.

JPMorgan predicted $610 million of capital outflows from Argentina, due to the reclassification. – Reuters