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UPDATE 2-MSCI EM currency index hits record high on skidding dollar, perky yuan

UPDATE 2-MSCI EM currency index hits record high on skidding dollar, perky yuan

05/07/2021 10:35
UPDATE 2-MSCI EM currency index hits record high on skidding dollar, perky yuan

Adds quotes

- MSCI's emerging market currency index .MIEM00000CUS sailed to a new record high on Friday, lifted by the dollar .DXY skidding to a multi-month low in the wake of disappointing jobs data.

The developing markets currency benchmark, which is dominated by Asian currencies such as China's yuan CNY=, CNH=, was up 0.7% at 1,739.93, having hit as high as 1,741.34. China's yuan strengthened more than 0.5% in offshore trading CNH= on Friday to hit its best level in 2-1/2 months.

The index is up more than 1% since the start of the year after recording more than 3% gains in 2019 and 2020.

"There is a weak dollar story and that's absolutely required to get an upside in EM FX, but there is a EM-specific story as they catch-up in the reopening and improve in their COVID vaccination efforts," Dirk Willer, head of emerging market strategy at Citi.

Emerging nations are trailing developed countries in the rollout of vaccinations and, in an effort to try to help reduce that gap, U.S. President Joe Biden this week gave his support to waiving intellectual property rights for COVID-19 vaccines. nL1N2MS2IE

Major banks are divided over the outlook for emerging market currencies after year-end euphoria saw investors pile in thick and fast.

"We have been reducing EM risk in recent weeks, and we hold UW (underweight) FX given the shrinking list of attractive idiosyncratic opportunities and an upcoming period of EM growth underperformance," Luis Oganes at JPMorgan wrote in a note to clients on Thursday.

Meanwhile BlackRock recently upgraded local currency bonds to overweight, saying underperformance year-to-date had made valuations more appealing, especially against a backdrop of Treasury yields and the dollar stabilising. nL8N2MC4HD

Investment bank Morgan Stanley has also turned outright bullish on local currency-denominated emerging market bonds lately. nL8N2MD1YI

Citi's Willer said the bank had been positive on Latin America FX for some time but Friday's U.S. data helped ease market concerns about any tapering in the Federal Reserves's stimulus programme.

South Africa's rand ZAR= has emerged as the best performing currency among major emerging markets since the start of the year, up 3%, while Turkey TRY= and Argentina ARS= have seen their currencies tumble some 10% over the same period.

MSCI emerging market currency index and dollarhttps://tmsnrt.rs/2Q3jurK

EM currencies YTD and MTDhttps://tmsnrt.rs/3tu97KW

(Reporting by Karin Strohecker; Additional reporting by Tom Arnold;
Editing by Rachel Armstrong, William Maclean and Alex Richardson)

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