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EMERGING MARKETS-Central banks wade in as forex losses spiral
August 12, 2015 / 9:29 AM / 2 years ago

EMERGING MARKETS-Central banks wade in as forex losses spiral

LONDON, Aug 12 (Reuters) - Emerging stocks, bonds and currencies extended losses on Wednesday after China allowed its yuan to weaken for the second straight day, with some central banks forced to curb sharp falls in their currencies.

The yuan touched 6.4508 per dollar, its lowest since July 2011, after authorities lowered the midpoint in the yuan’s trading range by 1.6 percent. Offshore-traded yuan lost 2 percent.

While China denies it is embarking on a currency devaluation programme and spot yuan prices rose towards close of trade, markets fear further slides lie ahead.

Asian currencies fell about 1 percent to the dollar to multi-year lows while several developing countries took steps to protect their exports from the effects of a weakening yuan. Vietnam for instance doubled its trading band for interbank dollar/dong transactions after which the currency hit a record low versus the dollar.

Sri Lanka raised its peg to the dollar by 5 cents to allow the rupee to depreciate.

Others stepped in to curb heavy currency losses, with even Chinese state-owned banks spotted selling dollars to keep the yuan around 6.43 per dollar.

Indonesia’s central bank also intervened “heavily” to defend the rupiah which is at 17-year lows, while India sold dollars through state-run banks, traders said. South Korean authorities are estimated to have sold about $2 billion on Tuesday and again on Wednesday.

“Asian currencies were already on the back foot before the Chinese move yesterday and this has added fuel to the fire,” UBS strategist Manik Narain said.

“Central banks may lean against the wind but they are not trying to arrest trends here. Going forward, in some markets with large hard currency liabilities and problematic inflation such as Indonesia and Turkey, FX weakness may force tighter monetary policy.”

The currency falls come despite a retreat to two-week lows in the dollar and some pricing out of U.S. rate rise expecations as a consequence of the Chinese moves.

“What you are seeing is a broad-based trade-weighted selloff which is a homegrown emerging markets move and nothing to do with U.S. rates going up,” Narain said.

Chinese shares fell 1 percent while Hong Kong’s benchmark index dropped 2.4 percent. The devaluation raises fears the economy is in worse shape than it seems and may spark an investor flight.

“Our worry is that a mix of corporate hedging, asset reallocation from domestic households and lesser portfolio inflows from foreigners will actually accelerate capital outflows rather than slow them down,” JPMorgan analysts wrote.

Falling commodities told on Russia and South Africa, where stocks fell between 1.5 percent and 2 percent .

The rand touched 15-year lows against the dollar while the rouble fell more than 1 percent.

MSCI’s emerging equity index lost 1.5 percent to hit the lowest in almost four years while emerging dollar bond yield spreads rose to 432 basis points over Treasuries, the widest since January.

In eastern Europe, the zloty and forint fell to one-month lows against the rising euro . Regional stocks fell more than 1 percent

For GRAPHIC on emerging market FX performance 2015, see

For GRAPHIC on MSCI emerging index performance 2015, see

For GRAPHIC on MSCI emerging Europe performance 2015, see

For GRAPHIC on MSCI frontier index performance 2015, see

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Editing by Louise Ireland)

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