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Kuala Lumpur - Emerging-market currencies and stocks advanced for a fifth day as traders pushed back forecasts for when the Federal Reserve will increase US interest rates, improving demand for higher-yielding assets.
All of the developing-nation currencies trading on Wednesday strengthened against the dollar, led by the South Korea won, Malaysian ringgit and Taiwan dollar. The won appreciated to the strongest in 14 months after the nation’s credit rating was raised this week. A gauge of emerging-market shares headed for its highest close in more than a year.
“The overriding issue in the Asia basket is the Goldilocks principle that the US economy is healthy but not so buoyant enough to elicit any sort of Fed response,” said Stephen Innes, a senior trader at Oanda Asia Pacific Pte in Singapore.
“Risk-on sentiment remains very well supported on the back of the perception that central banks are going to remain accommodative for the foreseeable future.”
Emerging-market assets have rallied from their lows earlier this year as improving sentiment toward China eased concern the world’s second-largest economy was slowing. At the same time, US data has been gaining momentum, though not fast enough to convince the Fed to raise interest rates. Crude oil, a gauge of the global-growth outlook, has also recovered.
Currencies
The MSCI Emerging Markets Currency Index rose 0.5% as of 08:12 on Wednesday, having gained 1.6% in its current five-day rally. The gauge has advanced 10% from this year’s low set in January.
The won appreciated 1.3%, and the the ringgit and Taiwan dollar both gained 0.8%.
S&P Global Ratings raised South Korea’s credit rating one level on Monday to AA, the third-highest investment grade, citing the country’s steady economic performance, sound fiscal position and flexible monetary policy.
The dollar dropped against its major counterparts for a second day as traders trimmed the probability of a Fed rate increase by year-end to 45% as of Tuesday, from 47% the previous day. The odds were at 93% at the end of 2015, according to data compiled by Bloomberg based on futures contracts.
“As rate-increase expectations get moved further out, equities tend to rally as investors are forced to move further out the risk curve,” Logan Best, vice president for securities trading at INTL FCStone Financial in Winter Park, Florida, wrote in an email.
“The net take away with global rates is that we are likely going to be lower for longer than anyone was expecting.”
Stocks
The MSCI Emerging Markets Index of shares gained 0.3%, set for its highest close since July 2015. Eight of the 10 industry groups rose, led by consumer-staple companies and utilities. The developing-nation has advanced 14% this year.
Benchmark indexes rallied 1.4% in Vietnam, and 0.5% in both Sri Lanka and Taiwan.
Bonds
Goldman Sachs Asset Management is betting a rally in emerging-market debt will last as global central banks pump cash into their economies, and is even turning to distressed Venezuelan bonds for greater returns.
Demand for emerging-market assets will be supported as the European Central Bank keeps monetary policy loose and after the Fed turned more “dovish,” said Owi Ruivivar, managing director in Singapore who helps oversee about $1trn for the Wall Street firm.
“We have been incredibly constructive on emerging-market fixed income,” said Ruivivar, who co-manages the $5.7bn GS Emerging Markets Debt Portfolio that has gained 13% in the past year. “We’re in an environment where you’ve got liquidity for longer in the developed world.”
