Would Real and Rouble Continue

Central bankers in the developing world are treading a fine line managing price pressures in places where the scars of hyperinflation are fresh and also nurturing economies still struggling with the coronavirus pandemic.

“Investors will ultimately favor those countries in which central banks are able to get ahead of inflation. It’s essential that central banks react pro-actively.”

Jon Harrison, the London-based managing director for emerging-market macro strategy at TS Lombard

So far, Brazil and Russia stand out, he said.

Central bank chief Roberto Campos Neto has said he’s willing to do whatever is needed to keep Brazil’s inflation within target, and economists are unanimous in predicting another hike this week for Latin America’s largest economy.

Loomis Sayles & Co. is another fan of Brazilian bonds and says further currency strength should help contain the pace of price growth.

Elsewhere, hawkish comments from Russia’s central bank chief will probably support the ruble, which may help to stabilize inflation expectations, said Anders Faergemann, a money manager at PineBridge Investments in London.

A fourth rate hike is “very likely” in July, Nabiullina told an online briefing Friday after lifting the key rate by a half percentage point.

The headline consumer-price index is also above target in countries including Turkey, Mexico, India, the Philippines and South Korea, HSBC Holdings Plc said in a research note this month.

Regardless of central bank efforts to contain inflation, any external inflation shock emanating from the U.S. would stymie even the most aggressive stance.

A quick rise in U.S. rates “can have negative repercussions,” said Michel Vernier, head of fixed income at Barclays Private Bank in London. “We have seen this during the 2013 taper tantrum when rates spikes at the U.S. long end caused major emerging-market outflows.”

We are of the opinion that there are legs for the rally to continue as the Fed is unlikely to hike the interest rate this year. The Fed need to first to talk of Tapering before it were to raise the topic on rate hike. For now, most economist would expect taper in late 2021.

Reference

Bloomberg, 2021-06-13, “Bond Funds Cheer Emerging Markets Moving Fast to Choke Inflation”