Brazil’s real defied the downbeat mood in emerging market currencies, strengthening against the dollar as the market clung on to hope that the appointment of interim president Michel Temer would herald a change in the country’s economic fortunes.
Last week’s Senate vote to impeach Dilma Rousseff from the presidency was seen by many forex strategists as the culmination of the real’s political risk-driven rally which has made it the biggest gainer this year on the currency market.
The final two days of last week saw the real fall 2.7 per cent as the reality of the task facing the new Temer administration sank in. Monday’s trading, however, suggested investors were not yet ready to call the end of the real rally, pushing the currency 0.9 per cent higher.
Poland’s zloty strengthened 1 per cent, as the country surprisingly avoided a downgrade from rating agency Moody’s, and the Russian rouble rose strongly on the back of oil nudging $50 a barrel.
Much of the rest of emerging markets looked decidedly pale, not helped by soft data out of China over the weekend.
Flows data suggested sentiment in EM has deteriorated, said Luis Costa at Citigroup, probably because momentum in commodity prices had been fading and confidence in equities was weaker.
The currency market was also on alert for US inflation data on Tuesday to maintain dollar strength following its Friday rally following better than expected retail sales data.
If the dollar continued to climb and China data softened, a further rise in the currency against the renminbi would “take its pound of flesh out of the broader markets and in particular emerging markets”, said Brad Bechtel of Jefferies International.
South Africa’s rand dropped 2 per cent to a two-month low and government bonds deteriorated after the government denied a report that finance minister Pravin Gordhan would soon be arrested over controversy surrounding the tax authority, which he previously ran.
In a year marked by strong gains across EM currencies, the rand has underperformed and a combination of weak fundamentals and rising political risk meant that was likely to continue, said Win Thin, an analyst at Brown Brothers Harriman.
Slow growth has driven unemployment towards 27 per cent, and although support for the ruling ANC was likely to drop, Mr Win said the party should hold on to power at municipal elections this summer.
“President [Jacob] Zuma’s second and final term doesn’t end until 2019, and he has so far proven impervious to various scandals,” he added