Emerging currencies just off highs

Emerging currencies hovered just off recent multi-week highs on Friday, underpinned by a relatively neutral statement from the US Federal Reserve, yen weakness and healthy equity markets. Emerging markets had rebounded on Thursday, with many currencies rising to multi-week highs as equities recovered from an almost week-long selloff.
The Fed's statement after holding US interest rates unchanged reinforced the view that rates will remain unchanged this year. The US central bank acknowledged a recent easing in core inflation but said upward price pressures remain a concern.
Equity markets seesawed as early Asian-session gains fizzled out but lower-than-expected Japanese inflation hit the yen and made investors confident the currency will remain cheap enough to borrow and sell for carry trades.
"We are seeing a bit of stabilisation after yesterday's rebound. With equities rising and volatility declining we should see the higher-yield currencies moving higher in coming weeks," said Murat Toprak, currency strategist at Societe Generale in London.
He said it was significant the Fed had dropped the word "elevated" in referring to inflation, a development he saw as positive for emerging markets. Traders reported modest selling in currencies after the strong gains of the previous session but most remain close to multi-week highs.
The Polish zloty was a bright spot, trading at a six-week high against the dollar thanks to a surprise rate increase this week and expectations that policy could be tightened faster and further than expected.
The forint pulled back 0.10 percent but was close to the two-month high hit on Thursday while Romania's leu continued to climb, hitting a new 4-1/2 year high against the euro. The lira gained 0.4 percent to 1.31 per dollar helped also by HSBC which raised Turkey to overweight in its equity portfolio and cut Hungary to neutral.
Emerging equities were flat after gains of almost 1pc on Thursday. "The currencies are mostly following equities. As long as US equities continue to rally, we will still see a strong performance from emerging markets," a trader in London said. "As for the Fed it changed nothing, the situation is the same as yesterday morning."
Toprak said he favours the zloty and the Turkish lira, with the latter still offering a double-digit real yield. "The key rate in Poland will reach 5 percent in coming months and that will be very supportive for the zloty," he said forecasting a year-end exchange rate of 3.70 per euro. "In Turkey there is a window of opportunity for gains. I'm cautious as there is some political uncertainty but there is an opportunity to earn some carry before the elections."
The S African rand fell back 0.3 percent against the firmer dollar after touching a one-month high on Thursday when the currency received support from better global risk sentiment and the likelihood of at least one more rate rise.