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Cracks appear in emerging-market currencies as sell-off endures

[DUBAI] Are emerging-market currencies starting to feel the heat? After several days of relative calm in the foreign-exchange world even as stocks and bonds sold off amid the trade-war jitters, it was a story of larger-than-normal declines in Asia.

The MSCI Emerging Market Currency Index was set to have the biggest drop in more than two weeks as the won, rupiah and yuan depreciated. Should the negotiations end without a deal - China Vice Premier Liu He is heading to Washington for talks today - the commodity-sensitive currencies of the emerging world, some of which have offered the best carry this year, may be most vulnerable.

As Bloomberg's Eddie van der Walt writes, these include the ruble, Chilean peso, South African rand and Peruvian sol, which have shown some of the strongest correlations with the Bloomberg Commodity Index since the weekend Trump tweets.

WHERE'S THE VOLATILITY?

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One factoid to calm the nerves: currency volatility hasn't really risen as high as one might have expected, with the JPMorgan Volatility Index ending Wednesday at 8.85, well off its peak earlier this year and considerably short of the 9.73 average over the past 12 months. As Bank of America noted in a report yesterday, the price action suggests a market more obsessed with trade tension than a trade war itself.

LIRA LONE GAINER

The only winner early Thursday in Asia trading was the Turkish lira, but that appeared to be nothing more than a technical bounce, given the dollar-lira's 14-day relative strength index edged up to 83 yesterday and has been above the reversal-signaling 70 level for the past two weeks. There certainly weren't any obvious fundamental drivers behind it.

Bloomberg's London-based emerging-market reporter Selcuk Gokoluk pointed out yesterday how Turkey's local-currency bonds have this year handed investors losses that are now bigger than those inflicted by Argentina. Given talk of a rate hike from the central bank on June 12, the prospect of a turnaround driven by yield-hungry buyers can't be ruled out.

SKITTISHNESS

Elsewhere, there was little let-up in the skittishness across risk assets that has prevailed pretty much since the Trump tweets. The MSCI index of emerging-market stocks extended its declines as benchmark gauges in China, Taiwan, Malaysia, South Korea and the Philippines tumbled. Average spreads on sovereign dollar bonds widened 1 basis point relative to U.S. Treasuries.

PHILIPPINES RATE CALL

Traders were standing by for a rate cut in the Philippines following data showing the economy grew at the slowest pace in four years in the first quarter. While a 5.6 per cent growth rate is nothing to be ashamed off, it fell short of most economists' forecasts. The Philippine Stock Exchange PSEi Index slipped almost 2 per cent, but it enjoyed a little bump-up later, evidence of expectations the central bank will seek to counter the effects of the country's budget-approval delays with 25 basis-point reduction today, following 175 basis points of increases in 2018.

A cut would be the second for Asian emerging-market central banks this week, following Malaysia's on Tuesday. Brazil and Thailand stood pat yesterday. Chile and Peru are expected to do likewise later today.

ON THE WATCH-LIST

Finally, a few things for the watch-list.

Results are starting to trickle in from South Africa's election, Mexico releases consumer-price data that are likely to show an acceleration in April, and Argentina's former President Cristina de Kirchner is due to present her newly published autobiography in Buenos Aires. As speculation increases that she has a decent chance of beating Mauricio Macri in October's election, look out for clues as to whether she will run.

BLOOMBERG