Emerging-market volatility bets rise as trade war rattles yuan

Chinese, Taiwanese and Philippine trade data for July this week will give an indication of whether the trade tension is starting to weigh on regional exports. (Bloomberg pic)

DUBAI: Emerging markets may be headed for a period of increased volatility as the midyear lull saps liquidity and the US-China dispute leaves traders struggling to decipher the yuan’s likely direction.

Chinese, Taiwanese and Philippine trade data for July this week will give an indication of whether the trade tension is starting to weigh on regional exports. The standoff has already prompted BlackRock Inc., the world’s largest asset manager, to trim its holdings of developing-nation assets, saying that it may be one of many dynamics weighing on global growth. US data on initial jobless claims, scheduled for release Thursday, are forecast to increase.

“With uncertainty on US-China trade issues in the backdrop, EM will certainly react to any developments, either escalation or détente, from the US side,” said Maximillian Lin, a Singapore-based emerging markets Asia strategist at NatWest Markets.

China’s markets in the spotlight after tariff threats

A gauge of expected price swings in emerging markets climbed to the highest level since February 2017 on Monday, while the offshore yuan’s one-week implied volatility jumped to a six-month high last week. And the negative correlation between dollar-yuan and developing-nation currencies has deepened since April as the two counties exchange blows.

What you need to know in emerging markets this week

The onshore yuan is the worst-performing emerging-market currency after Turkey’s lira in the past month, which spurred action from Chinese policymakers. The People’s Bank of China will impose a reserve requirement of 20% on some trading of foreign-exchange forward contracts, it said in a statement Friday evening.

Investors will watch how the various market-drivers — from central-bank action and the volatility in technology stocks — will affect developing-nation assets “when markets are thin,” said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London. “The emphasis should be on keeping durations short and focusing on higher-quality credit over the next month.”

Philippines, Romania set to hike rates
In Asia, Bank of Thailand and Bangko Sentral ng Pilipinas have rate decisions on Wednesday and Thursday, respectively The Philippine central bank raised its policy rate in May and June in an attempt to curb accelerating inflation and support one of Asia’s worst-performing currencies this year. BSP Governor Nestor Espenilla has pledged to make a “strong follow-through monetary adjustment” Romania’s central bank will hold a rate meeting on Monday, with a majority of analysts predicting an increase to 2.75%, as policymakers seek to rein in inflation running above target Argentina’s central bank meets Tuesday, after the country’s production minister speculated that rates, currently at a world-topping 40%, are falling. The peso slumped last Wednesday after the central bank surprised markets by announcing a reduction in the daily FX auction, seeking to contain the loss of international reserves. The currency is down more than 30% this year and has been under pressure as traders fear high rates may push the nation into a recession Hungary’s July inflation data and minutes of the central bank’s latest rate meeting on Wednesday may provide more clarity on whether the National Bank of Hungary’s loose policy is still appropriate Peru also decides on rates Thursday
Brazil’s minutes and presidential race
Brazil swap and currency traders will on Tuesday scan minutes of last week’s monetary policy meeting for insight into how inflation could affect the path of interest rates. Policymakers kept rates unchanged at a record low last week and acknowledged that pressure on emerging markets had eased. That decision, coupled with a strong stock-market performance at the end of the week, helped the real outperform peers on Friday The real’s other main driver is the presidential race. Market-friendly candidate Geraldo Alckmin picked as his running mate Senator Ana Amelia, a vocal opponent of the Workers’ Party who is seen as helping him drive a wedge between supporters of front-runner and former military officer Jair Bolsonaro. Campaigning starts Aug 16 Left-wing Workers’ Party formally endorsed Luiz Inacio Lula da Silva in the upcoming presidential election, even though the former leader has been in jail since April on a corruption conviction. While he remains hugely popular among the millions of Brazilians who saw their quality of life improve during his administration, he’s also loathed by many for a sweeping corruption scandal and populist economic measures pursued by his party that helped trigger a crippling recession

Iran’s rial sinks
The first phase of reimposed US economic sanctions on oil-rich Iran takes effect this week, following President Donald Trump’s decision in May to withdraw from the international nuclear deal The country plans to implement a new financial rescue package on Monday to try to halt the decline in the rial, which has dropped to lows this year

Data drivers
Analysts will scrutinize China’s July foreign-exchange reserves, due Tuesday, for evidence of capital outflows. The yuan fell 6.1% over June and July. Any sign of significant outflows could spur authorities to step in Malaysia and Indonesia also report foreign-exchange reserves data for July on Tuesday. The figures will give an indication of how much the Bank Indonesia has been stepping in to support the falling rupiah Indonesia released second-quarter GDP figures on Monday, with year-on-year growth beating estimates to increase 5.2%. Chile will release economic activity data for June on Monday, while the Philippines will release GDP data for the most recent quarter on Thursday Taiwan will release CPI data on Tuesday, followed by China and the Czech Republic on Thursday In Poland, Finance Minister Teresa Czerwinska will present her views Monday on the country’s macroeconomic prospects Hungary will release industrial production figures for June on Tuesday