EMERGING MARKETS-Currencies get reprieve as policymakers offer support

Thu Jan 30, 2014 1:31pm EST

By Walter Brandimarte and Natsuko Waki
    RIO DE JANEIRO/LONDON, Jan 30 (Reuters) - Emerging markets
recovered on Thursday from a sharp selloff as Latin American
stocks and currencies gained and Russia's ruble and Turkey's
lira rebounded after policymakers pledged to take any necessary
measures to stabilize their markets, though investors worried
the respite would be short-lived.
    Traders said recent panic selling had abated for now as
markets priced in the current pace of stimulus withdrawal by the
U.S. Federal Reserve.
    The Fed on Wednesday said it would cut its monthly bond
purchases by another $10 billion, and a Reuters poll on Thursday
showed that economists expect the Fed to maintain the pace of
the taper throughout this year. 
    China's economic slowdown, however, left investors walking
on egg shells after an index of business conditions for Chinese
manufacturers dipped for the first time in six months in
January. Many emerging countries, including Brazil and Chile,
greatly rely on commodities exports to China, which makes their
currencies vulnerable to further losses should China, the
world's second largest economy, disappoint forecasts.
 
    "China risk has risen, and U.S. Treasury yields have fallen"
since the beginning of the year, David Lubin, chief emerging
market economist at Citi, wrote in a research note. "The net
effect is to create a reminder that weak emerging markets still
face a rather hostile environment for their exports."
    Citi forecast real exchange rates to rise further in weak
developing countries with "unfinanceable current account
deficits" in order to cool down domestic consumption and
imports.
    Turkey and South Africa were among countries that hiked
interest rates this week, with only an initial limited impact on
investor sentiment.
    Currencies eventually steadied on Thursday as central banks
from Istanbul to Moscow and Brasilia took new measures or
stepped up verbal intervention to shore up their markets.
    The ruble came off a record low against the euro and
its lowest level in nearly five years against the dollar after
the Russian central bank said it would make unlimited
interventions if the exchange rate strays outside of its target
corridor. 
    A Reuters poll of economists found that the Russian currency
is expected to firm by mid-year to 34 per dollar after some
short-term turbulence. It last traded at 34.80 per dollar, 0.8
percent stronger on the day. 
    The lira rose 0.6 percent after the Turkish
central bank said it may further tighten liquidity if necessary
after massively raising all its interest rates late on
Wednesday. 
    Romania's leu climbed 0.3 percent against the euro 
after the country's central bank intervened indirectly in the
market. Even in India, whose currency has not sold off
as much as its peers, policymakers pledged to take all necessary
steps to ensure stability in the country's financial markets.
 
    
    RELIEF IN LATAM MARKETS 
    On the other side of the Atlantic, the Brazilian real 
gained 0.8 percent after the central bank announced it would
auction $2.3 billion on the spot market on Friday through
repurchase agreements. 
    The offer, which is intended to roll over similar dollar
lines that expire next month, underscores Brazil's commitment to
supporting liquidity in its foreign exchange market.
    Other Latin American currencies were also in the black, with
the Mexican peso gaining 0.7 percent and the Chilean peso
 0.3 percent stronger.
    A benchmark MSCI index of emerging market stocks 
erased losses after earlier hitting a 4-1/2-month low. The Latin
American portion of the index gained 1 percent.
    The recent emerging markets rout had gained traction as many
investors deemed returns too low given the outlook for higher
U.S. Treasuries yields. Much of the outflows was triggered by
retail investors, who are usually more averse to short-term
volatility.
    "Institutional investors have remained faithful, (but) it
may be that some of these positions are starting to crack," said
Manik Narain, emerging market strategist at UBS.
    
    Key Latin American stock indexes and currencies at 1720 GMT
    
     Stock indexes                    daily %     YTD %
                         Latest       change      change
 MSCI LatAm             2,904.70      1.07        -10.21
                                                  
 Brazil Bovespa         47,637.96     0.17        -7.51
                                                  
 Mexico IPC             40,862.59     0.42        -4.36
                                                  
 Chile IPSA             3,419.47      0.77        -7.56
                                                  
 Chile IGPA             17,048.95     0.66        -6.46
                                                  
 Argentina MerVal       5,726.45      1.18        6.22
                                                  
 Colombia IGBC          12,006.50     0.48        -8.15
                                                  
 Peru IGRA              15,399.21     0.02        -2.25
                                                  
 Venezuela IBC          2,798.44      0.05        2.26
                                                  
                                                  
 Currencies                           daily %     YTD %
                                      change      change
                        Latest                    
 Brazil real            2.4120        0.85        -2.29
                                                  
 Mexico peso            13.3170       0.66        -2.16
                                                  
 Chile peso             547.1000      0.35        -3.84
                                                  
 Colombia peso          2007.5000     -0.02       -3.76
                                                  
 Peru sol               2.8150        0.25        -0.78
                                                  
 Argentina peso         8.0175        -0.16       -19.02

 Argentina peso         12.6700       2.21        -21.07