The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
Emerging market (EM) currencies saw gains as investors prepared for a week of global interest-rate decisions affecting carry trades in developing economies.
MSCI’s index for developing-world currencies recorded its second gain in nine sessions, rising less than 0.1% as of 10am in London. Meanwhile, the EM stocks gauge fell 0.3%, led by declines in tech shares, including Tencent Holdings Ltd and Taiwan Semiconductor Manufacturing Co Ltd.
Barclays strategists noted increased unpredictability in market moves recently due to political surprises globally. This volatility has impacted carry trades, where traders borrow at lower interest rates in developed markets to invest in higher-yielding developing-world assets. The strategists, including Themistoklis Fiotakis, highlighted that the case for carry trades is weaker, given the volatility and potential for further disruptions.
Volatility Spikes Navigating a gradually slowing US economy and uncertainties surrounding the upcoming US presidential elections, investors face a turbulent market. Volatility spikes can quickly erode carry gains, complicating investors' ability to maintain positions. With limited cushion from US rate spreads and emerging currencies already priced to erode, the carry trade case remains weak.
Carry trades funded in yen and dollars have suffered the most, with Chile’s peso and the Taiwanese dollar being particularly affected. Both the Bank of Japan (BOJ) and the Federal Reserve are set to decide on interest rates on Wednesday. The possibility of further policy tightening by the BOJ sent the yen to an almost three-month high last week.
Investors will closely examine the Fed’s policy announcement and chair Jerome Powell’s remarks for any hints supporting expectations of a first interest-rate reduction in September.
Regional Developments In Latin America, Venezuela’s opposition claims it can prove Edmundo González won Sunday’s election, according to María Corina Machado, who led the campaign against President Nicolás Maduro.
India took steps to limit foreign ownership of its bonds, signaling discomfort with the substantial inflows linked to the inclusion of its debt in a key global index.
Ethiopia’s eurobond saw its most significant jump since December after securing a $3.4 billion program with the International Monetary Fund, pushing the security maturing in 2024 to its highest level since November 2021.
Key Takeaways:
- Emerging market currencies gained slightly as global interest-rate decisions approached.
- MSCI’s index for developing-world currencies rose less than 0.1%, while the EM stocks gauge fell 0.3%.
- Volatility and political surprises have impacted the viability of carry trades.
- The BOJ and Federal Reserve's upcoming rate decisions are critical for market direction.
- Regional developments include Venezuela’s election dispute, India's bond ownership limitations, and Ethiopia’s IMF deal.
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