FX hits highest level since August on bets of Fed, China’s COVID policy pivots

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Currencies in emerging markets hit their highest level since late August on Thursday tracking global markets and weakness in the dollar after U.S. Federal Reserve Chair Jerome Powell’s overnight comments that interest rate hikes could be scaled back “as soon as December.”

Powell on Wednesday said it was time to slow the pace of coming interest rate hikes, while also signaling a protracted economic adjustment, boosting stocks and other risky assets globally.

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The dollar index slipped 0.1%, adding to its previous session’s losses and lifting the emerging markets currencies index 0.7% higher.

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EM currencies recovered 3.6% in November after five straight months of losses and posted their best monthly performance since March 2016.

The MSCI’s index for emerging market stocks rose 0.8%, extending its sharp rebound. The index had posted its best monthly performance in November since May 2009, recovering 14.6% last month.

“Growing market conviction that the Fed is likely to slow down the pace of tightening resulted in a broadly weaker dollar, which in turned stimulated demand for risky assets as reflected in EM stocks posting the strongest gains throughout November so far this year,” said Piotr Matys, senior FX analyst at InTouch Capital.

“In addition to that, investors are hopeful that China will gradually reopen.”

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The yuan rose against the tepid dollar, while China’s blue-chips stock index added 1.1% by close as investors cheered signs of some relaxation in China’s strict anti-COVID curbs.

China’s Caixin/S&P Global manufacturing Purchasing Managers’ Index (PMI) stood at 49.4 in November, still below the 50 mark that separates growth from contraction.

In central and eastern Europe, the Polish zloty slipped 0.3% against the euro after data showed the Polish manufacturing sector remained deep in contraction territory with orders and output falling rapidly due to the economic uncertainty caused by the war in Ukraine.

The Hungarian forint inched 0.1% down after data showed the seasonally-adjusted PMI dropped to 54.7 in November from 56.4 in October.

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The European Commission approved on Wednesday Hungary’s post-pandemic recovery plan, but said Budapest would not receive any payments until it implemented reforms to bolster judicial independence and tackle corruption.

The South African rand slid 1% in choppy trading against the dollar amid continued political uncertainty.

President Cyril Ramaphosa has delayed an appearance in parliament to answer lawmakers’ questions, a statement said, after he requested time to consider a panel report that found preliminary evidence that he had violated his oath of office.

In Turkey, factory activity contracted for a ninth consecutive month in November as weakness in demand caused a slowdown in orders and output, a business survey showed. The lira fell 0.2% against the dollar. For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX

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