LONDON: Emerging equities snapped a two-day losing streak as investors looked to the euro zone to deliver more policy easing, though the Hungarian forint fell as a central banker hinted at a resumption in interest rate cuts.
MSCI's emerging equity index rose half a percent, shrugging off falls in Chinese markets driven by data showing inflation had risen to 20-month highs in February .
Markets are focusing on how much the European Central Bank, which has already cut rates into negative territory, will ease at its meeting later on Thursday.
"There will be more inflows into the Eastern European bond market to exploit the interest rate differential between the euro area and the Eastern European economies," said Mikhail Liluashvili, a strategist at Credit Suisse.
But excessive currency appreciation is unlikely, he said. That is because regional policymakers, wary of heavy capital inflows, are already leaning against stronger currencies.
Hungary's deputy central bank governor Marton Nagy said the bank would use all available tools to meet its inflation target and hinted interest rate cuts could resume.
That pushed the forint 0.3 percent lower versus the euro. Hungarian bonds slipped 6-7 basis points (bps) and Budapest-based traders said swaps were pricing some 35 bps in rate cuts. The Polish zloty is close to two-month highs to the euro and bond yields are down 30 basis points (bps) since end-January.
The currency could be hit by more policy easing. Most expect new central bank apppointees to be of a dovish bent.
Jerzy Zyzynski, a candidate for the Monetary Policy Council, said on Wednesday the bank should consider quantitative easing and suggested there was room to cut interest rates.
Czech central bank official Tomas Holub meanwhile said negative interest rates would not be preferred but must be considered.
Liluashvili said Czech authorities could end up raising the exchange rate cap against the euro if they needed to ease monetary conditions. The cap is at 27 per euro but he said 28 or 28.5 could be an option.
Czech 5- and 10-year yields are at record lows.
Elsewhere, the rouble firmed 0.4 percent against the dollar as oil prices stayed above $40 per barrel, while against the euro it firmed 0.7 percent to 2-1/2 month highs. Egyptian stocks rallied almost 4 percent after authorities loosened caps on foreign exchange deposits for some importers.
Brazil's real traded near six-month highs as markets watched for progress on the corruption probe that saw former President Luiz Ignacio Lula da Silva indicted on Wednesday. Credit default swaps slipped 2 basis points to 399 bps, after a 7 bps fall on Thursday.
"Something that markets have been looking for - given the high carry, the apparent inflation peak and the slight prospects for change, Brazilian assets remain in positive mode," Commerzbank analysts said.
They advised selling Brazil CDS and buying protection against South Africa, which looks set for a ratings downgrade to junk.
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