The Emerging market currencies traded mixed on Wednesday as investors expected U.S. inflation data that could sway the Federal Reserve's accommodative policy stance and as sentiment was dented by surging inflation in China.
The Chinese factory gate inflation hit a 26 - year high in October, and consumer price rising quickened, mainly on energy costs led by a shortage of coal resources.
The MSCI's index of emerging market currencies was flat, with investors waiting for inflation data in the U.S. which is expected to show a jump to 5.8%, its highest in over three decades.
While most Asian currencies held their ground, Turkey's lira slumped 0.6%, and South Africa's rand dropped 0.4%. The drop in rand came a day after state utility Eskom said the risk of power outages would remain until another 4,000 to 6,000 megawatts of capacity was added to the grid.
Since expectations are already for it to jump past previous levels, I don't see U.S. CPI adding more to the pressure of EM currencies that are currently face since expectations are already for it to jump past previous levels, but if inflation cracks the 6% level today we will definitely see Ripple effects in the EU space, according to Simon Harvey, a senior analyst at Monex Europe.
A high inflation levels could see a rise in U.S. bond yields and raise rate increase bets by the Federal Reserve in its upcoming policy meetings.
The higher developed market rates cause debt burdens and cause capital outflows from foreign institutions invested in emerging markets. It narrows the differences in interest rate which make EM currencies attractive for carry trade.
The rise in Chinese price is naturally leading to some pressure in the EU space, according to Harvey, which currency is more sensitive to yield moves and that central banks are not moving according to inflation patterns like the rand and the lira, which is a case of which the rise in Chinese price is more sensitive to yield moves.
Russia's rouble has been tacked on 0,5% due to rising oil prices. The finance ministry's OFZ bond auctions are seen as supporting the currency.
The dollar index rose against major rivals after weakening in the past three days.
Most bourses outside Asia rose as EMX stocks erased early losses after trading up 0.2% on gains in tech stocks in Hong Kong and Taiwan.
Fears of contagion from China's embattled property sector remained with China Evergrande Group due for an offshore bond payment on Wednesday, whiledevelopers Fantasia Holdings plunged up to 50% after they said there was no guarantee that it would be able to meet its financial obligations.