EMERGING MARKETS-Mexico peso dips on Fed minutes, Ukraine bonds dive
By Michael O'Boyle and Christine Murray
MEXICO CITY Feb 19 (Reuters) - Emerging market currencies weakened on Wednesday after minutes from the last U.S. Federal Reserve meeting suggested policymakers would keep up the pace of a withdrawal of monetary stimulus.
Meanwhile, Ukraine's bond prices fell as more violence hit Kiev, while mounting unrest in Venezuela drove the price of its credit default swaps to near five-year highs.
Emerging market assets have slumped since last May on expectations that less monetary stimulus will drive up U.S. yields and pull back a tide of investment that had flooded into emerging markets in recent years.
Minutes of the Fed's Jan. 28-29 policy meeting, released on Wednesday, showed several officials wanted to drive home the idea that their asset-purchase program would be trimmed in predictable, $10-billion steps unless there is a big economic surprise this year.
Mexico's peso and the South African rand, two of the most liquid emerging market assets, slipped to their weakest levels in nearly one week after the Fed minutes.
Many emerging market currencies had steadied in February after sharp drops in January, but views on the Fed could drive more selling, analysts said.
"I think we are back to selling emerging markets," said Win Thin, an analyst at Brown Brothers Harriman in New York. "The tapering is unfolding and at some point we have to talk about rate hikes. That is the next shoe to drop."
Chile's peso posted its bigest decline against the dollar in more than two weeks, the day after the central bank cut interest rates by 25 basis points and maintained its bias towards more easing as the top copper exporter's economy runs out of steam.
Turkey and Brazil have been raising interest rates to support their currencies and fight the risk that higher import prices could drive up inflation.
Analysts note that easy money policies from the Fed had driven gains in emerigng market assets across the board as investors sought out higher yields.
But the witdrawal of that global liquidity is now exposing emerging markets with political and economic problems.
Worries about Argentina and Turkey sparked indiscriminate selling of emerging market assets in January but analysts said problems in the Ukraine and Venezuela would not spark a similar global selloff. Some even see signs of a bottom.
"We think that this is a temporary situation that will not last," veteran investor Mark Mobius, chairman of Templeton Emerging Markets Group, said at a conference in Mexico City. "We're nearing the bottom of this exodus."
UKRAINE, VENEZUELA PROTESTS
Protesters poured into a central Kiev square on Wednesday, a day after at least 25 people were killed in demonstrations. Protests that began in November have hit the Ukraine's heavily indebted economy and drained the central bank of foreign reserves.
Russia is a key supporter of Ukraine's government, but has so far agreed to pay only $2 billion of a promised $15 billion aid package. Protestors are demanding Ukraine embrace a wide-reaching trade deal with the European Union, over Russia's objections.
Prices for Ukraine's dollar bonds fell, with the 2020 dollar bond down 0.41 cents of a dollar while the bond maturing in 2023 hit an all-time low. The hryvnia currency fell to a fresh five-year low.
Bank of America Merrill Lynch said Ukraine could face a liquidity crunch in the next few months, noting the country has mounting debt payments while foreign reserves are at an eight-year low after the central bank spent about 8 percent of its reserves on currency intervention in January alone.
While mounting violence in Ukraine is troubling on many levels, Mobius said worries that it could wreck the economy are overblown.
"Despite all the bad news that you hear about Ukraine actually they're in a very sweet spot" economically, Mobius said, noting that "they have the Europeans who want to help them and they have the Russians who want to help them."
Neighboring Russia saw its rouble hit an all-time low versus the euro after the finance ministry said it plans to buy nearly $6 billion in foreign currency to replenish one of its sovereign wealth funds.
The benchmark MSCI equity index dipped 0.19 percent with strong Chinese stocks countering negative sentiment from Ukraine and Russia.
Student-led protests in Venezuela over issues including inflation, crime, corruption and product shortages continued to flare after security forces arrested opposition leader Leopoldo Lopez on Tuesday.
Investors reacted by driving up the cost of insuring Venezuela's debt for five years to its highest since April 2009 .
Debt prices have fallen to levels often associated with a nation at or near default. Still, Venezuela's vast oil reserves have lent support, giving investors comfort they will be repaid.
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