Emerging market currencies fall on prospect of Fed rate increase

Kuala Lumpur - Most emerging market currencies fell as data showing expansion in the US manufacturing sector fuelled wagers that the Federal Reserve will raise interest rates before year-end.

Malaysia’s ringgit was one of only two developing-nation currencies to advance out of 24 tracked by Bloomberg, as an overnight rally in energy prices offset the prospect of a Fed rate increase as soon as next month.

Emerging market stocks in Asia advanced on speculation the impact of stronger US economic growth will be felt globally.

Brent crude surged to a six-week high on Monday, while gauge of the dollar strengthened and Treasuries fell after a report showed US manufacturing expanded in September. Cleveland Fed President Loretta Mester said in a Bloomberg Television interview Monday that she expects inflation to move back toward the central bank’s 2% target over the next couple of years, and a "pre-emptive" rate hike would be appropriate.

Traders assign 17% odds of tightening at November’s Federal Open Market Committee meeting, and a 61% chance of action by year-end.

"Dollar strength and supported US Treasury yields off the back of better-than-expected US data are reminding markets that November remains a live meeting," said Christopher Wong, a foreign-exchange strategist at Malayan Banking in Singapore.

"Oil price gains are supporting the ringgit."

Currencies

The MSCI Emerging Markets Currency Index was little changed at 12:05 in Hong Kong after gaining 0.2% on Monday. South Africa’s rand and the South Korean won fell 0.3%, while the Philippine peso, Thai baht and Turkish lira lost 0.2%.

The ringgit strengthened 0.3%. Malaysia is the only net exporter of oil among Asia’s major economies and derives about a fifth of government revenue from energy-related sources. India’s rupee added 0.1%.

Malaysian and South Korean financial markets resumed trading after a holiday on Monday. Markets in mainland China are closed all week for holidays.

Stocks

The MSCI Emerging Markets Index climbed 0.2%, adding to a 0.9% advance on Monday. Ten of the gauge’s 11 industry groups rose led by consumer discretionary and materials companies.

In the US, the Institute for Supply Management’s manufacturing index advanced to 51.5 from August’s 49.4 reading that marked the first contraction in six months, figures from the Tempe, Arizona-based group showed on Monday. A reading above 50 signals growth.

"An improving US economy will boost global growth: it will be a rising tide that will lift all boats," said Jonathan Ravelas, chief market strategist at BDO Unibank in Manila.

China Evergrande Group surged 8.8% in Hong Kong, poised for its steepest advance since October 2015 after the developer announced a plan to inject assets into a property company listed on the Chinese mainland, taking advantage of higher valuations there.

Inventec Corporation climbed 3.5% in Taipei, heading for the highest close since July 2014. The stock was raised to outperform by Credit Suisse Group last week with a 12-month price target at NT$31.

The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong climbed 0.4%, adding to Monday’s 1.1% gain. The FTSE Bursa Malaysia KLCI Index advanced 0.6%.

South Korea’s Kospi gained 0.6%, while equities benchmarks in Taiwan, Thailand and Vietnam advanced at least 0.4%.

Bonds

South Korea’s 10-year government bonds fell for the first time in eight days, pushing the yield up four basis points to 1.45%. A report Tuesday showed South Korea’s current-account surplus narrowed to $5.51bn in August, the smallest since April, from a revised $8.67bn the previous month.