EM-FX at one-month high on weaker dollar, China reopening hopes

Emerging market currencies rose to their highest in a month on Monday as China inched towards ending a two-month Covid-19 lockdown in its commercial hub and the dollar weakened on easing bets of a more aggressive Federal Reserve.

The MSCI index of emerging market currencies gained 0.6%, while stocks advanced 2.1% to their highest in more than three weeks.

Shanghai authorities will cancel many conditions for businesses to resume work from Wednesday, a city official said on Sunday, and will also introduce policies to support its battered economy.

The Chinese yuan rose to 6.6485, hitting a one-week high against the dollar, while the blue-chip CSI300 and Hong Kong stock indexes gained 0.7% and 2%, respectively.

“There is definitely more cautious optimism across markets, but we have to be mindful that this is most likely a bear market rally,” said Piotr Matys, senior FX analyst at In Touch Capital Markets.

In central Europe, the Czech crown was flat against the euro after central banker Tomas Holub said on Sunday he was likely to support a further interest rate hike in June of about 75 basis points.

“What’s important to note about the June meeting is that the rate hike, which is the most likely scenario, could mark the end of the tightening cycle,” said Matys.

“Instead of raising rates, it may try to strengthen the Czech crown using its vast reserves. The strengthening of the crown would be justified as inflation to a large extent is driven by high prices of imported energy commodities,” Matys added.

Meanwhile, the South African rand firmed 0.3% against a weaker dollar.

The greenback eased as investors scaled back bets of aggressive interest rate hikes by the Federal Reserve after last week’s data signalled peaking inflation.

The Turkish lira extended losses to trade at 16.38 per dollar. The lira’s near 10% plunge this month and debt market danger gauges at levels last seen during the 2008 global crash have prompted investor concerns that a fresh crisis might be brewing.

Russia’s rouble reversed some of last week’s heavy losses as it retained support from capital controls and Russia’s strong trade account.

Russia plans to settle its Eurobond obligations using a mechanism similar to the scheme used to pay for Russian gas in roubles, Finance Minister Anton Siluanov told the Vedomosti newspaper.