EMERGING MARKETS-FX recovers, Hungarian forint up ahead of central bank meeting

Hungary's forint rose on Tuesday ahead of an expected interest rate hike by the country's central bank, with most other emerging market currencies recovering some recent losses as focus turned to potential monetary tightening measures.

Hungary's forint rose on Tuesday ahead of an expected interest rate hike by the country's central bank, with most other emerging market currencies recovering some recent losses as focus turned to potential monetary tightening measures. MSCI's index of emerging market (EM) currencies jumped 0.5%, boosted by a 0.4% rise in the Chinese yuan as concerns over the property sector eased. The currency hit a four-month high to the dollar.

South Africa's rand led to gains in Europe, the Middle East, and Africa (EMEA) with a 0.8% jump. The sentiment was aided by a falling dollar and expectations that monetary policy tightening by EM central banks would outpace that by the Federal Reserve. MSCI's EM stocks index rose 1.1%, also boosted by Chinese shares after the country's market regulator flagged efforts to boost support for private firms amid sluggish economic activity.

Hungary's forint rose 0.3% versus the euro and 0.7% versus the dollar as investors anticipated a 15 basis point (bps) interest rate hike, to 1.80%, amid rapidly rising inflation spurred by the lifting of COVID-related restrictions earlier this year. While Hungary's central bank was the first among its central European peers to raise rates this year, it has disappointed markets with smaller-than-expected hikes in recent months.

"The market has become more skeptical, as to whether the central bank will step up the pace again even though inflation is likely to rise again in Q4," Antje Praefcke, FX and EM analyst at Commerzbank wrote in a note. "If the market remains skeptical towards the central bank, the rate hike cycle is unlikely to provide any support to the forint in the end."

The Polish zloty lagged gains in its peers amid uncertainty over an escalating row between Poland's government and the European Union (EU). EU chief Ursula von der Leyen said the bloc was considering options to respond to a Polish court ruling that questioned the supremacy of EU law.

A recent rise in inflation is also expected to weigh on the zloty, and likely spur more monetary tightening by the central bank. For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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