Emerging FX-Bounce as risk appetite recovers

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Emerging market currencies firmed on Wednesday as equities rose following a Wall Street record during the previous session while Thailand backtracked on some stringent currency control measures announced just two days ago.

The euro hit record highs versus the yen and climbed against the dollar after an upbeat German business sentiment survey on Tuesday. Currencies of central Europe, which is closely linked to the euro zone economy, tracked the euro's gains.

Emerging markets also gained from rises in Asian and European equities and higher Wall Street futures. Thai stocks bounced off a 15 percent fall as the central bank said currency control measures would not affect equities.

"There was a bit of nervousness on EM yesterday because of the Thai move but the wobble caused by Thailand is correcting now," said Ian Davies, senior dealer at BOTM-UFJ in London. "They have all come back this morning as there is no reason for any contagion."

The Slovak central bank left interest rates unchanged as expected to try to cool the crown which has hit record highs several times in the past month and was 0.2 percent higher on Wednesday.

The Czech crown hit a fresh record high of 27.595 per euro as the Czech central bank also held rates. Polish rates are also expected to remain unchanged later in the day.

Davies said a large U.S. bank had been an active zloty buyer, pushing the currency to a session high of 3.8073 per euro and targeting 3.80. He saw the forint well supported around current levels of 252.50, a 0.5 percent gain .

"There is no reason for a selloff on the currencies. I think we shall have a stable run up to the holiday period," he said.

South Africa's rand and bonds received a small boost from data indicating inflation is indeed slowing, but markets have already factored in a 50 basis points rate rise in February.

The data showed November consumer inflation easing 0.1 percent on the month and steady at 5.4 percent year-on-year. The rand briefly inched above 7 per dollar before failing to pierce the barrier convincingly while yields on the benchmark bond fell 4.5 bps to 8.260 percent.

The Johannesburg stock market rose over 1 percent.

"There has been a bit of readjustment by some banks on the interest rate outlook following the CPI release but I still think the central bank will err on the hawkish side and raise rates by 50 bps in February," said Dorothee Gasser, Middle east and Africa economist at ING Bank in London.

Thursday will bring wholesale inflation data but Gasser said private sector credit data due on Dec. 29 would be more important as a record high figure last month signalled this year's 200 bps in rate rises have yet to filter through to credit markets.

"The rand's strength is surprising ... The current account deficit is being fully financed but looking forward, an environment with higher euro zone and Japanese rates and slowing growth in G3 countries is not favourable for capital flows and South Africa's general dependence on portfolio flows is not comforting," Gasser added.

BOTM-UFJ's Davies forecast the currency to move in a 6.95-7.05 range for now.

Emerging market investors are also looking to U.S. data on durable goods and inflation on Friday which could signal if the economy is still in course for only a moderate slowdown.

On Tuesday, data showed U.S. producer prices posted their largest gains in over three decades last month while housing starts also increased after a fall in October.

[LONDON/Reuters/Finance.cz]